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CHARTERED INSTITUTE OF TAXATION OF NIGERIA

INCOME TAXATION
STUDY PACK

WRITTEN BY: JULIUS BABATUNDE ADESINA: B. Sc.; M. B. A; FCA; ACMA; ACTI.

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TABLE OF CONTENT

Chapter Page

Table of Content 1

1 The Administration of Tax 2

2 Principles of Taxation 15

3 Taxation of Income / Profits 39

4 Computation of Tax Liabilities of Individuals 49

5 Income Tax Aspects of Settlement, Trusts and Estates 77

6 Company Income Tax 87

7 Taxation of Companies in Special Circumstances 121

8 Education Tax 141

9 Administration and Computation of Capital Gains Tax 147

10 Administration and Computation of Withholding Tax 156

11 Administration and Computation of Deferred Tax 159

12 National Technology Development Agency Act (Information Technology Levy) 163

13 Treatment of Taxation in Companies Accounts 164

14 CITN Past Questions and Answers 167

Appendix 1: Bibilography 210

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CHAPTER 1
THE ADMINISTRATION OF TAX

Learning Outcomes

At the end of this discourse, students will be able to know the different organs concerned in the
administration of tax, the functions of each organ, powers, jurisdiction, and composition. Also, students learn
the procedure of appeal to the Tax Appeal Tribunal, against the decision of the tax administrators, and further
appeal to the judicial courts of the National Assembly.

Introduction

In Nigeria, the bodies responsible for the administration of tax are five.
These are:

i. The Joint Tax Board (JTB);


ii. The Federal Inland Revenue Service Board (FIRSB);
iii. The State Internal Revenue Service Board (SIRSB);
iv. The Local Government Revenue Committee (LGRC); and
v. The Joint State Revenue Committee (JSRC).

However, in 1992, Technical Committees were set up at the Federal and State levels of tax administration.
These five bodies, alongside the two technical committees shall be discussed hereunder.

CONSTITUTIONAL POWER TO IMPOSE TAX

The constitutional power to impose tax lies with the federal Government through the National Assembly. To
some extent the various State Assemblies in the federation can also impose specific taxes in their jurisdiction
as prescribed in the Approved Taxes List Act. However, there are some organs of Government, created by law,
to administer all the taxes that have been legislated by the National Assembly or the State Assemblies.

The composition, rights, powers and functions of the various tax organs

As earlier noted, there are various types of tax organs concerned with the administration of tax. These organs
are conferred with various powers and functions, and their compositions vary in accordance with their
existence. Their compositions, functions, and duties are discussed herein.

1. The Joint Tax Board

Section 86(2) of the Personal Income Tax Act, 2004 establishes the Joint tax board. The board comprises the
following members:

i. the Chairman of the Federal Board of Inland Revenue, who shall be chairman of the Board. He is
appointed pursuant to section 11 of the Federal Inland Revenue Service (Establishment) Act, 2007; and

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ii. one member from each State, being a person experienced in income tax matters nominated either by
name or office, from time to time, by the Commissioner charged with responsibility for matters
relating to income tax in the State in question; and such nomination shall be evidenced by notice
thereof in writing delivered to the secretary to the Board.

For the proper discharge of the duty of the Joint Tax Board, an officer who is experienced in income tax
matters is appointed by the Joint Tax Board to be the secretary to the Board. Also, it may, in accordance with
existing law, appoint such other staff as the Board may deem to be necessary, from time to time, including on
secondment or transfer, from any public service in Nigeria. A caveat is however drawn here as the secretary is
not a member of the Board but shall only be responsible for maintaining records of the Board’s proceedings
and for signifying all decisions of the Board.

The Rights, Powers, and Duties of the Joint Tax Board

The Joint Tax Board exercises the following powers and duties:

1. the power or duties conferred on it by express provisions of the Federal Inland Revenue Services
(Establishment) Act (FIRSEA), and any other powers and duties arising under the Act which may be
agreed by the Government of each territory to be exercised by the Board;

2. the powers and duties conferred on it by any enactment of the Federal Government imposing tax on
the income and profits of companies, or which may be agreed by the Minister to be exercised or
performed by it under the enactment in place of the Federal Inland Revenue Service Board;

3. advise the Federal Government, on request, in respect of double taxation arrangement concluded or
under consideration with any other country, and in respect of rates of capital allowances and other
taxation matters having effect throughout Nigeria and in respect of any proposed amendment to the
FIRSEA;

4. use its best endeavours to promote uniformity both in the application of FIRSEA and in the incidence
of tax on individuals throughout Nigeria; and

5. Impose its decisions on matters of procedure and interpretation of the FIRSEA on any State for
purposes of conforming with agreed procedure or interpretation.

2. The Federal Inland Revenue Service Board

The Federal Inland Revenue Service is charged with powers of assessment, collection of, and accounting for
revenues accruable to the Government of the Federation; and for related matters. The object of the Service is
to control and administer the different taxes and laws specified in the First Schedule of the FIRSEA or other
laws made or to be made, from time to time, by the National Assembly or other regulations made thereunder
by the Government of the Federation and to account for all taxes collected.

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Establishment of the Federal Inland Revenue Service and its Management Board

In 2007, the Federal Government promulgated an Act to provide for the establishment of the Federal Inland
Revenue Service. Section 1 of the Act makes provision for the establishment of the Service, and also provides
that the Service:

a. shall be a body corporate with perpetual succession and a common seal;


b. may sue or be sued in its corporate name; and
c. may acquire, hold or dispose of any property, movable or immovable, for the purpose of carrying out
any of its functions under this Act.

According to the Act, the Service shall have such powers and duties as are conferred on it by the Act or by any
other enactment or law on such matters on which the National Assembly has power to make law.

Establishment and Composition of the Management the FIRS Board

The FIRSEA makes provision for the establishment of a board to be known as the Federal Inland Revenue
Service Board, for the Service. The Board shall have overall supervision of the Service as specified under the
FIRSEA.

Composition of the Management FIRS Board

The Board consists of the following members:

a. the Executive Chairman of the Service who shall be experienced in taxation as Chairman of the Service
to be appointed by the President and subject to the confirmation of the Senate;

b. six members with relevant qualifications and expertise who shall be appointed by the President to
represent each of the six geo-political zones;

c. a representative of the Attorney-General of the Federation;

d. the Governor of the Central Bank of Nigeria or his representative;

e. a representative of the Minister of Finance not below the rank of a Director;

f. the Chairman of the Revenue Mobilization, Allocation and Fiscal Commission or his representative
who shall be any of the Commissioners representing the 36 States of the Federation;

g. the Group Managing Director of the Nigerian National Petroleum Corporation or his representative
who shall not be below the rank of a Group Executive Director of the Corporation or its equivalent;

h. the Comptroller-General of the Nigeria Custom Service or his representative not below the rank of
Deputy Comptroller-General;

i. the Registrar-General of the Corporate Affairs Commission or his representative not below the rank of
a Director; and

j. the Chief Executive Officer of the National Planning Commission or his representative not below the
rank of a Director.

Note that the members of the Board, other than the Executive Chairman, shall be part-time members.

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Powers of the Management Federal Inland Revenue Service Board

The FIRSEA sets out the powers of the Board. It provides that the Board shall:

a. provide the general policy guidelines relating to the functions of the Service;

b. manage and superintend the policies of the Service on matters relating to the administration of the
revenue assessment, collection and accounting system under the FIRSEA or any enactment or law;

c. review and approve the strategic plans of the Service;

d. employ and determine the terms and conditions of service including disciplinary measures of the
employees of the Service;

e. stipulate remuneration, allowances, benefits and pensions of staff and employees in consultation with
the National Salaries, Income and Wages Commission; and

f. do such other things which in its opinion are necessary to ensure the efficient performance of the
functions of the Service under the Act.

Functions of the Federal Inland Revenue Service

Section 8 of the FIRSEA makes provisions for the functions of the Federal Inland Revenue Service. Under the
section, the Service has responsibilities to:

1. assess persons including companies, enterprises chargeable with tax;

2. assess, collect, account and enforce payment of taxes as may be due to the Government or any of its
agencies;

3. collect, recover and pay to the designated account, any tax under any provision of the FIRSEA or any
other enactment or law;

4. in collaboration with the relevant Ministries and agencies, review the tax regimes and promote the
application of tax revenues to stimulate economic activities and development;

5. in collaboration with the relevant law enforcement agencies, carry out the examination and
investigation with a view to enforcing compliance with the provisions of the FIRSEA;

6. make, from time to time, a determination of the extent of financial loss and such other losses by
Government arising from tax fraud or evasion and such other losses (or revenue foregone) arising
from tax waivers and other related matters;

7. adopt measures to identify, trace, freeze, confiscate or seize proceeds derived from tax fraud or
evasion;

8. adopt measures which include compliance and regulatory actions, introduction and maintenance of
investigative and control techniques on the detection and prevention of non-compliance;

9. collaborate and facilitate rapid exchange of information with relevant national or international
agencies or bodies on tax matters;

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10. undertake exchange of personnel or other experts with complementary agencies for purposes of
comparative experience and capacity building;

11. establish and maintain a system for monitoring international dynamics of taxation in order to identify
suspicious transactions and the perpetrators and other persons involved;

12. provide and maintain access to up to date and adequate data and information on all taxable persons,
individuals, corporate bodies or all agencies of Government involved in the collection of revenue
for the purpose of efficient, effective and correct tax administration and to prevent tax evasion or
fraud.

13. maintain database, statistics, records and reports on persons, organizations, proceeds, properties,
documents or other items or assets relating to tax administration including matters relating to
waivers, fraud or evasion;

14. undertake and support research on similar measures with a view to stimulating economic
development and determine the manifestation, extent, magnitude and effects of tax fraud,
evasion and other matters that affect effective tax administration and make recommendations to
the Government on appropriate intervention and preventive measures;

15. collate and continually review all policies of the Federal Government relating to taxation and revenue
generation and undertake a systematic and progressive implementation of such policies;

16. liaise with the office of the Attorney-General of the Federation, all Government security and law
enforcement agencies and such other financial supervisory institutions in the enforcement and
eradication of tax related offences;

17. issue taxpayer identification number to every taxable person in Nigeria in collaboration with States
Boards of Internal Revenue and Local Government Councils;

18. carry out and sustain rigorous public awareness and enlightenment campaign on the benefits of tax
compliance within and outside Nigeria;

19. carry out oversight functions over all taxes and levies accruable to the Government of the Federation
and as it may be required, query, subpoena, sanction and reward any activities pertaining to the
assessment, collection of and accounting for revenues accruable to the Federation; and

20. carry out such other activities as are necessary or expedient for the full discharge of all or any of the
functions under the FIRSEA.

21. In addition to the above, the Service may, from time to time, specify the form of returns, claims,
statements and notices necessary for the due administration of the powers conferred on it by the
FIRSEA.

The Technical Committee of the Federal Inland Revenues Service Board

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By virtue of section 9 of the FIRSEA, a technical committee of the Federal Inland Revenue Service Board is
established.

Composition of the Technical Committee

The Technical Committee of the FIRS Board consists of the following members:

I. the Executive Chairman of the Service as Chairman;


II. all the Directors and heads of departments of the Service;
III. the Legal Adviser of the Service; and
IV. the Secretary to the Board.

Note that the Technical Committee may co-opt from the Service such staff as it may deem necessary for the
effective performance of its functions under the Act.

Functions of the Technical Committee

In accordance with the provisions of the FIRSEA, the Technical Committee shall:

a. consider all tax matters that require professional and technical expertise and make recommendations
to the Board;

b. advise the Board on any aspect of the functions and powers of the Service under the FIRSEA; and

c. attend to such other matters which may from time to time be referred to it by the Board.

3. The State Internal Revenue Service Board

A State Board of Internal Revenue is established for each State of the Federation. The operational arm of the
Board is known as the State Internal Revenue Service.

Composition of the State Internal Revenue Service Board

The members of the State Internal Revenue Service Board comprise:

1. the executive head of the State Service as chairman, who shall be a person experienced in taxation
and be appointed by the Governor from within the State Service;

2. the Directors from within or outside the State Service;

3. a Director from the State Ministry of Finance; iv. the Legal Adviser to the State Service;

4. three other persons appointed by the State Governor on their personal merits, and one each
representing a Senatorial District in the State; and

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5. the Secretary of the State Service who shall be an ex-officio member. This secretary shall be appointed
by the Board from within the State Service.

Note that, to form a quorum, any five members of the State Board, of whom one shall be the Chairman
or a Director is enough.

Functions and Powers of the State Board

The State Board shall be responsible for:

1. ensuring the effectiveness and optimum collection of all taxes and penalties due to the Government
under the relevant laws;

2. doing all such things as may be deemed necessary and expedient for the assessment and collection of
the tax and shall account for all amounts so collected in a manner to be prescribed by the
Commissioner;

3. making recommendations, where appropriate, to the Joint Tax Board on tax policy, tax reform, tax
legislation, tax treaties and exemption as may be required, from time to time;

4. generally controlling the management of the State Service on matters of policy, subject to the
provisions of the law setting up the State Service; and

5. appointing, promoting, transferring and imposing discipline on employees of the State Service.

Other powers of the State Internal Revenue Service Board

These include the power to:

i. be autonomous in the day-to-day running of the technical, professional and administrative affairs of
the State Service; and

ii. subject to subsection (4) of this section, authorize any person, by notice in the Gazette to:

a. perform or exercise on behalf of the State Board, any function, duty or power conferred on the
State Board; and

b. Receive any notice or other document to be given or delivered to or in consequence of the Act
and any subsidiary legislation made under it.

There is however a limitation to the power of the State Board to delegate as the Act provides that
“notwithstanding the provisions of subsection (3) of this section, the State Board shall not delegate any power
conferred on it under sections 2, 6, 7, 17, 46, 47, 50, 53, 54, 55, 57, 78, 86, 99, 102, 103 and 104 of this Act to
any person.”

Technical Committee of the State Internal Revenue Service Board

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Section 89 of the PITA makes provision for the establishment of the Technical Committee of the State Board of
Internal Revenue Service. The Committee comprises of:

i. the Chairman of the State Board as Chairman;


ii. the Directors within the State Service;
iii. the Legal Adviser to the State Service; and
iv. the Secretary of the State Service.

Powers and Duties of the Technical Committee

The Technical Committee of the State Board has powers to:

 co-opt additional staff from within the State Service in the discharge of the duties;

 consider all matters that require professional and technical expertise and make recommendations to
the State Board;

 advise the State Board on all its powers and duties specifically mentioned in section 88 of the FIRSEA;
and

 attend to such other matters as may, from to time, be referred to it by the Board.

4. The Local Government Revenue Committee

The PITA made provision for the establishment of the Local Government Revenue Committee for
each of the Local Government Area of every State in Nigeria.

Composition of the Local Government Revenue Committee

The Local Government Revenue Committee comprises of:

i. Supervisor for Finance as Chairman of the Committee;


ii. three local government Councilors as members; and
iii. two other persons experienced in revenue matter to be nominated by the chairman of the local
government on their personal merits.

Functions of the Local Government Revenue Committee

 The Revenue Committee shall be responsible for the assessment and collection of all taxes, fines and
rates under its jurisdiction and shall account for all amounts so collected in a manner to be prescribed
by the chairman of the local government; and

 The revenue committee shall be autonomous of the local government treasury and shall be
responsible for the day-to-day administration of the Department which forms its operational arm.

5. The Joint State Revenue Committee

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This Committee is established for each State of the Federation.

Composition of Joint State Revenue Committee

The Joint State Revenue Committee comprises the following members:

i. the Chairman of the State Internal Revenue Service as the Chairman;

ii. the Chairman of the Local Government Revenue Committee;

iii. a representative of the bureau on local government affairs not below the rank of Director;

iv. a representative of the Revenue Mobilization Allocation and Fiscal Commission, as an observer;

v. the State Sector Commander of the Federal Road Safety Commission, as an observer;

vi. the Legal Adviser of the State Internal Revenue Service;

vii. the secretary of the Committee who shall be a staff of the State Internal Revenue Service.

Functions of the Joint State Revenue Committee

The functions of the State Joint Revenue Committee shall be to:

a. implement decisions of the Joint Tax Board;

b. advise the Joint Tax Board and the State and local governments on revenue matters;

c. harmonize tax administration in the State;

d. enlighten members of the public generally on State and local government revenue
matters; and

e. carry out such other functions as may be assigned to it by the Joint Tax Board.

Tax Appeal Tribunals

In the administration of taxes, one of the functions of the Administrator is to raise notice of assessment. Any
taxable person that is aggrieved by an assessment or demand notice made upon him by the Service or
aggrieved by any action or decision of the Service under the provisions of the tax laws may appeal against such
decision or assessment or demand notice within the stipulated period of time, to the Tax Appeal Tribunal (the
Tribunal). Such appeal must be filed within a period of 30 days from the date on which a copy of the Order or
decision which is being appealed against is made, or deemed to have been made by the Service and it must be
in such form and be accompanied by such fee as may be prescribed, provided that the Tribunal may entertain
an appeal after the expiry of the said period of 30 days if it is satisfied that there was sufficient cause for the
delay.

Where a notice of appeal is not given by the appellant within the period specified, as required, the assessment
or demand notices shall become final and conclusive and the Service may charge interests and penalties in
addition to recovering the outstanding tax liabilities which remain unpaid from any person through
proceedings at the Tribunal. In essence, where the Service is aggrieved by the non-compliance by a person in

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respect of any provision of the tax laws, it may appeal to the Tribunal where the person is resident giving
notice in writing through the Secretary to the appropriate zone of the Tribunal.

Specifically, Section 59 of the FIRSEA provides for the establishment of the tribunal, while the fifth schedule to
the Act makes provisions for the Jurisdiction, Authority, and procedure of a Tax Appeal Tribunal. According to
the fifth schedule to the FIRSEA, “pursuant to section 59 (1) of this Act, there shall be established a Tax Appeal
Tribunal (hereinafter referred to as “the Tribunal”) to exercise the jurisdiction, powers and authority conferred
on it by or under this Schedule.” It also states that the Minister may by notice in the Federal Gazette specify
the number of zones, matters and places in relation to which the Tribunal may exercise jurisdiction.

Composition of the Tax Appeal Tribunal


A Tax Appeal Tribunal shall consist of five members. These members are called the “Tax Appeal
Commissioners,” and are appointed by the Minister.

The Chairman for each zone of the Tax Tribunal shall be a legal practitioner who has been so qualified to
practise for a period of not less than 15 years with cognate experience in tax legislation and tax matters. He
presides at every sitting of the Tribunal and in his absence, the members shall appoint one of them to be the
Chairman. The quorum at any sitting of the Tribunal shall be three members.

Jurisdiction of the Tribunal

Paragraph 11 of the Fifth Schedule to the FIRSEA sets out the jurisdiction of the Tribunal. These are:

1. the power to adjudicate on disputes, and controversies arising from the following tax laws:

i. Companies Income Tax Act, Cap. C21 L.F.N., 2004;

ii. Personal Income Tax Act, P8 and PIT Amendment Act 2011;

iii. Petroleum Profits Tax Act Cap. P13 L.F.N., 2004;

iv. Value Added Tax Act Cap V1 and VAT Amendment Act 2007;

v. Capital Gains Tax Act Cap. C1 L.F.N., 2004; and

vi. Any other law contained in or specified in the First Schedule to this Act or other laws made or
to be made from time to time by the National Assembly.

In the execution of its jurisdiction however, the Tribunal must apply such provisions of the tax laws referred to
in paragraph 11(1) as may be applicable in the determination or resolution of any dispute or controversy
before it.

Confirming the jurisdictional power of the Tribunal regarding the administration of PITA, Section 60 of the
Personal Income Tax Act, as amended by Section 14 of the Personal Income Tax (Amendment) Act No. 20 of
2011, provides that “the Tax Appeal Tribunal established pursuant to section 59 of the Federal Inland Revenue
Service (Establishment) Act, 2007 shall have the power to entertain all cases arising from the operation of this
Act.”

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Thus, a taxable person being aggrieved by an assessment to income tax made upon him having failed to agree
with relevant tax authority in the manner provided in subsection (3) of section 58 of the PITA, may appeal
against the assessment on giving notice as provided within thirty days after the date of service of the refusal of
the relevant tax authority to amend the assessment as desired.

Nevertheless, where in the course of its adjudication, the Tribunal discovers evidence of possible criminality,
the Tribunal shall be obliged to pass such information to the appropriate criminal prosecuting authorities, such
as the office of the Attorney-General of the Federation or the Attorney General of any State of the Federation
or any relevant law enforcement agency.

Powers of the Tribunal

The Tribunal, for the purpose of discharging its functions as noted under the fifth Schedule to the FIRSEA has
power to:

i. summon and enforce the attendance of any person and examine him on oath;
ii. require the discovery and production of documents;
iii. receive evidence on affidavits;
iv. call for examination of witnesses or documents;
v. review its decision;
vi. dismiss an application for default or deciding matters exparte;
vii. set aside any Order or dismissal of any application for default or any Order passed by it exparte; and
viii. do anything which in the opinion of the Tribunal is incidental or ancillary to its functions under The
Fifth Schedule to the FIRSEA.

Procedure before Tax Appeal Tribunal

There are rules and procedures guiding the Tribunal in the discharge of its duties. Paragraph 15 of the
Schedule to FIRSEA lays down the fact that as often as may be necessary, Tax Appeal Commissioners shall
meet to hear appeals in the jurisdiction or zone assigned to that Tribunal.

Where a Tax Appeal Commissioner has a direct or indirect financial interest in any appeal pending before the
Tribunal or where the taxpayer is or was a client of that Tax Appeal Commissioner in his professional capacity,
the Commissioner must declare such interest to the other Tax Appeal Commissioners and refrain from sitting
in any meeting for the hearing of that appeal.

Prior to the sitting on a tax matter, the Secretary to the Tribunal must give seven clear days’ notice to the
Service and to the appellant of the date and place fixed for the hearing of each appeal except in respect of any
adjourned hearing for which the Tax Appeal Commissioners have fixed a date at their previous hearing.

All notices, documents, other than decisions of the Tribunal, may be signified under the hand of the Secretary.
While all appeals before the Tax Appeal Commissioners must be held in public, the onus of proving that the
assessment complained of is excessive shall be on the appellant.

According to Paragraph 15(7),

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“At the hearing of any appeal, if the representative of the Service proves to the satisfaction of the Tribunal
hearing the appeal in the first instance that:—

 the appellant has for the year of assessment concerned, failed to prepare and deliver to the Service
returns required to be furnished under the relevant provisions of the tax laws mentioned in paragraph
11;

 the appeal is frivolous or vexatious or is an abuse of the appeal process; or

 it is expedient to require the appellant to pay an amount as security for prosecuting the appeal,

the Tribunal may adjourn the hearing of the appeal to any subsequent day and order the appellant to deposit
with the Service, before the day of the adjourned hearing, an amount, on account of the tax charged by the
assessment under appeal, equal to the tax charged upon the appellant for the preceding year of assessment or
one half of the tax charged by the assessment under appeal, whichever is the lesser plus a sum equal to ten
percent of the said deposit, and if the appellant fails to comply with the order, the assessment against which
he has appealed shall be confirmed and the appellant shall have no further right of appeal with respect to that
assessment.”

After giving the parties an opportunity of being heard, the Tribunal may confirm, reduce, increase or annual
the assessment or make any such order as it deems fit. However, every decision of the Tribunal must be
recorded in writing by the Chairman and subject to the provisions of paragraph 16 of the fifth Schedule to
FIRSEA,1 a certified copy of such decision shall be supplied to the appellant or the Service by the
Secretary, upon a request made within 30 days of such decision.

According to the Act,

“Where upon the hearing of an appeal:

a. no accounts, books or records relating to profits were produced by or on behalf of the appellant;

b. such accounts, books or records were so produced but rejected by the Tribunal on the ground that it
had been shown to its satisfaction that they were incomplete or unsatisfactory;

c. the appellant or his representative, at the hearing of the appeal, has neglected or refused to comply
with a notice delivered or sent to him by the Secretary to the Tribunal, without showing any
reasonable cause; or

d. the appellant or any person employed, whether confidentially or other- wise, by the appellant or his
agent (other than his legal practitioner or accountant acting for him in connection with his ability to
tax) has refused to answer any question put to him by the Tribunal, without showing any reasonable
cause, the Chairman of the Tribunal shall record particulars of the same in his written decision”.
Appeals to the High Court

Where any of the parties before the Tribunal is dissatisfied with the decision of the Tribunal, such party may
appeal to the High Court. According to Paragraph 17 of the fifth Schedule to the FIRSEA, appeals lie from the
Tax Appeals Tribunal to the Federal High Court. The paragraph states:

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a. “Any person dissatisfied with a decision of the Tribunal constituted under this Schedule may appeal
against such decision on a point of law to the Federal High Court upon giving notice in writing to the
Secretary to the Tribunal within 30 days after the date on which such decision was given.

b. A notice of appeal filed pursuant to subparagraph (1) of this paragraph shall set out all the grounds of
law on which the appellant’s case is based.

c. If the Service is dissatisfied with the decision of the Tribunal, it may appeal against such decision to the
Federal High Court on points of law by giving notice in writing as specified in subsection (1) of this
section to the Secretary within 30 days after the date on which such decision was given.

d. Upon receipt of a notice of appeal under subparagraph (1) or (2) of this paragraph, the Secretary to the
Tribunal shall cause the notice to be given to the Chief Registrar of the Federal High Court along with all
the exhibits tendered at the hearing before the Tribunal.

e. The Chief Judge of the Federal High Court may make rules providing for the procedure in respect of
appeals made under this Act and until such rules are made, the Federal High Court rules relating to
hearing of appeals shall apply to the hearing of an appeal under this Act.”

As noted above, the role of the court, on appeal, is limited to a question of law. A court has no jurisdiction on
a question of fact. The court cannot reverse an earlier decision simply because the appellate judge would have
reached a different conclusion.

Further appeal against the decision of the Federal High Court at the instance of either party shall lie to the
Court of Appeal.

ILLUSTRATIVE QUESTIONS

1. (a) What are the composition and functions of the Joint Tax Board and Federal Inland Revenue Service
Board

(b) Briefly discuss the functions of the Technical Committee of the Federal Inland Revenue Service

2. As a Tax Consultant, the Managing Director of your company brought an assessment served on his
company by the Federal Inland Revenue Service complaining that the assessment is outrageous .

You observed that the amount assessed was higher than expected.

Required:
a. State what should be done in this circumstance,
b. Draft a letter of objection to the Tax Authority on the assessment, and
c. Should the Tax Authority reply your letter and insist that your client must pay the assessment.
What would be your reaction?

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CHAPTER 2
PRINCIPLES OF TAXATION

Definitions

The Oxford English Dictionary defines a tax as “a compulsory contribution to the support of government levied
on persons, property, income, commodities, transactions etc., now at a fixed rate mostly proportionate to the
amount on which the contribution is levied.” Thus, when stripped of its limited view as to the purpose of
taxation, it’s irrelevant description of tax base and its undue stress on proportionate as opposed to
progressive taxation, tells us very little, beyond that taxes are compulsory. To this criterion it may be added
that taxes are imposed under the authority of the legislature, that they are levied by a public body and that
they are intended for public purposes.

Jurisdiction

Under section 272 of the Constitution of the Federal Republic of Nigeria, 1999, the High Court of a State has
jurisdiction to hear and determine any civil proceedings in which the existence or extent of a legal right,
power, duty, liability, privilege, interest, obligation or claim is an issue.2 It may also hear and determine any
criminal proceedings involving or relating to any penalty, forfeiture, punishment or other liability in respect of
an offence committed by any person. However, the jurisdiction of a State High Court is subject to the
provisions of Section 251 of the Constitution, which confers exclusive jurisdiction on the Federal Court in
respect of some matters. Under section 251, the exclusive jurisdiction of the Federal High Court includes civil
causes and matters:

i. Relating to the revenue of the Government of the Federation in which the said Government or any organ
thereof or a person suing or being sued on behalf of the Federal Government is a party.

ii. Connected with or pertaining to the taxation of companies and other bodies established or carrying on
business in Nigeria and all other persons subject to Federal taxation.

iii. Connected with or pertaining to customs and excise duties, including any claim by or against the Nigerian
Customs Service or any member or officer thereof, arising from the performance of any duty imposed
under any regulation relating to customs and excise duties and export duties.

By virtue of Section 251 (3) of the Constitution, the Federal High Court also has jurisdiction and powers in
respect of criminal causes and matters arising out of the foregoing.

All matters pertaining to a federal tax must go to the Federal High Court. These will necessarily include
companies’ income tax, petroleum profits tax, custom and excise duties, stamp duties payable by corporate
bodies, capital gain tax payable by corporate bodies, education tax and value added tax. However, because of
the specialized nature of taxation, the income tax statutes provide that the cases should first go to the Tax
Appeal Tribunal.

In the case of personal income tax, stamp duties payable by individuals and capital gain tax payable by
individual which are charged by Federal law, but collected by State authorities, the cases arising from these
will go to the State High Courts simply because the Federal Government or any of its organs is not a party to

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the case. Since States collect and expend these taxes, they cannot be said to do the collection on behalf of the
Federal Government. Perhaps for this reason, the Personal Income Tax Act still confers jurisdiction on the
State High Courts.

Taxes collected by the local government authorities are often adjudicated upon in the Magistrate courts.
For instance, issues of tenement rate go to an Appeal Tribunal and appeals from the Tribunal go to the
Magistrates’ courts.

Definition of Trade, Business, Profession and Vocation. Tests of Trade

The meaning of Trade

For the purposes of the charge to tax in respect of the profits of a trade, the term “trade” is defined to include
“every trade, manufacture, adventure, concern in the nature of trade.” As this circular, and somewhat
unhelpful, definition of the expression “trade”, the courts have had to establish for themselves what in
essence amounts to trading; thus, in any particular case, in order to ascertain whether or not an individual has
traded or has engaged in an adventure in the nature of trade, reference must be made to the considerable
body of case law on this subject, and the principles emerging there from.

It has been judicially stated that the word “trade” must be given its ordinary dictionary sense, namely “a
pecuniary risk, a venture, a speculation, a commercial enterprise,” and that the other words in the statutory
definition cited above must be considered as enlarging that sense. In IRC v. Livingston Lord President Clyde
stated:

“I think the test which must be used to determine whether a venture such as we are
now considering is or is not, ‘in the nature of trade’ is whether the operations involved
in it are of the same kind, and carried on in the same way, as those which are
characteristic of ordinary trading in the line of business in which the venture was made.”

In the context of what constitutes a trade, Lord Wilberforce stated in Ransom v. Higgs in 1974:

“Trade involves, normally, the exchange of goods, or of services, for reward, not of all
services, since some qualify as a profession, or employment or vocation, but there must
be something which the trade offers to provide by way of business. Trade moreover,
presupposes a customer (to this too, there may be exceptions, but such is the norm), or,
as it may be expressed, trade must be bilateral – you must trade with someone. The
mutuality cases are based in part at least upon this principle.”

Another important consideration relating to what constitutes a trade was mentioned by Lord Wilberforce in
the same case:

“Trade is infinitely varied; so we often find applied to it the cliché that its categories are
not close. Of course they are not; but this does not mean that the concept of trade is
without limits so that any activity which yields an advantage, however indirect, can be
brought within the net of tax.”The latter point referred to by Lord Wilberforce is
illustrated by a series of dividend stripping cases which have been held not to constitute
trading, because “they were no more than a planned raid on the Revenue.”

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The meaning of Profession or Vocation

i. Profession

The most helpful judicial exposition of its meaning is to be found in the judgment of Scrutton
L.J. in IRC v. Maxse , where he stated that:

“It seems to me as at present advised that a ‘profession’ in the present use of language
involves the idea of an occupation requiring either purely intellectual skill, or of any
manual skill controlled, as in painting and sculpture or surgery, by the intellectual skill of
the operator, as distinguished from an occupation which is substantially the production
or sale or arrangements for the production or sale of commodities. The line of
demarcation may vary from time to time. The word ‘profession’ used to be confined to
the three learned professions, the Church, Medicine and Law. It has now, I think, a wider
meaning.”

Membership of a professional organization is an indication that an individual is carrying on a profession, but it


is by no means conclusive. It is a question of fact whether or not whether an individual is carrying on a
profession, so that the determination of the Appeal Commissioners will not be upset unless they have
misdirected themselves in law.

ii. Vocation

The word “vocation,” in the words of Denman J. in Partridge v. Mallandaine, “is analogous to
‘calling,’ a word of wide significance, meaning the way in which a man passes his life.” In that case, it
was held that a bookmaker who accepts bets is carrying on an organized vocation.

Similarly, in Graham v. Arnott, it was held that an individual who habitually supplied racing forecasts to
newspapers for reward was chargeable to tax. On the other hand, it will be noted that in Graham v. Green, an
individual was held not to be so chargeable in respect of gains derived from betting. Again, in Down v.
Compston, the winnings of a golf professional on bets on his own matches were held not to be the earnings of
a vocation. A dramatist, a land agent and a jockey have all been regarded as carrying on a vocation, whilst, on
the other hand, a film producer was not so treated.

Profits of Trades, Businesses, Professions or Vocations

Section 3(1)(a) of the P.I.T.A. 2004 charges to the tax the gains or profits arising from any trade, business,
profession or vocation, for whatever period of time such trade, business, profession or vocation may have
been carried on or exercised.

There is no formal definition of what constitutes trading in the Nigerian tax legislation and therefore in a
doubtful case the matter must ultimately be decided by the courts. Lord Jessel M.R. in Erichsen v. Last (1881)
8 Q.B.D. 414 stated at p.416:

“There is no principle of law which lays down what carrying on a trade is. There are a multitude of
things which together make up the carrying on of a trade, but I know of no one distinguishing ‘incident
for it is a compound fact made up of a variety of things’”

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See also, Arbico Limited v. Federal Board of Inland Revenue

Tests of Trade: – who is trading?

The trade must be carried on by the person whom it charges; the tax is levied on the traders and not on the
transactions each with a different partner, it is possible to conclude that in view of the frequency of the
transaction he was carrying on a trade but that his partners were not.

Where no profit accrues to the person by whom the trade is carried out no charge can be made on that
person. In Ransome Higgs, land was owned by a company owned by H and his wife. H agreed to a scheme by
which the company developed the land and paid the profits to a discretionary trust. It was held that the trade
of developing the land was not carried on by H, as Lord Reid put it, “He did not deal with anybody. He did not
buy or sell anything. He did not provide anyone with goods or service for reward. He had no profits or gain.”
There was no evidence that the trade carried on by the company was in fact carried on by H. H had not
compelled but merely persuaded the company to conduct a trading operation and so could not be said to be
the trader.

See also, Smart v. Lowndes.

Definitions of trade

(1) Illegal Trading

The question whether the profits of an illegal trade are taxable has produced conflicting dicta in most
jurisdictions but the answer clearly ought to be, and on balance of authority now is, yes. It was decided in
Partridge v. Mallandine that a bookmaker’s profits were taxable notwithstanding that wagering contracts
were unlawful, and in Lindsay, Woodard and Hiscox v. IRC that profits of illegal contract were taxable. These
cases merely decide however that the profits of a contract which the law will not enforce are nonetheless
taxable. No such explanation can be advanced for the decision of the Privy Council in Minister of Finance v.
Smith3 that the profits of illegal brewing during the prohibition era were taxable. Today the true principle is
that the taxpayer cannot set up the unlawful character of his act against the Revenue.

There have been some suggestions that the profits of burglary would not be taxable, because crime is not a
trade. It is however submitted that these should not be followed. Any other conclusion may lead to
distinctions between acts illegal per se and acts which are merely incidental to the carrying on of a trade.
There may be difficulty in calculation of profits as there is a civil obligation to restore the goods to their owner
and it should be remembered that a consistently unprofitable trade may not be a trade at all.

(2) Adventures in the nature of trade

The question whether there is a trade or an adventure in the nature is one of fact but the question cannot be
ignored for that reason. What follows is an attempt to synthesis the many cases and to indicate not only what
factors the courts take into account but also the frail nature of those factors.

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The United Kingdom Royal Commission in its final Report in 1954 listed six “badges of trade” (i) the subject-
matter of the realization, (ii) the length and period of ownership (iii) the frequency or number of similar
transactions by the same person, (iv) supplementary work on or in connection with the property realized, (v)
the circumstances that were responsible for the realization and finally (vi) motive. These badges are principally
important in determining what is an adventure in the nature of trade. See, Wisdom v. Chamberlain.

Badges of Trade (Purpose of profit)

An intention to make a profit is not a necessary ingredient of a trade. Operations of the same kind as, and
carried out in the same way, as those which characterize ordinary trading are not the less trading operations
because they make a loss or there is no intention to make a profit. However a scheme which inevitably
involves a loss may not be a trading transaction.

One must distinguish a trade from a merely charitable endeavour. In the Religious Tract and Book Society of
Scotland v. Forbes, the question was whether colportage, that is the sending out of colporteurs whose job was
to sell Bibles and to act as cottage missionaries, was a trade. The Court of Exchequer (Scotland) ruled that the
activity, which could not possibly be carried on at a profit, could not be a trade, with the result that the losses
on colportage could not be set off against what were undoubtedly trading profits from the society’s book
shops. It would therefore appear that while the impossibility of profit will prevent the activity from being a
trade, the absence of a profit motive will not.

If there is an intention to make a profit but then to apply it in some worthy way, there is a trading activity.
The tax system is concerned with the acquisition and not with the distribution of profit.

Motive for acquisition an Asset

The motive attending the acquisition of an asset is a factor which, when there is doubt, is to be thrown into
the balance. An acquisition under a relative’s last will and testament is clearly different from a purchase with a
view to speedy re-sale. If the taxpayer embarks on an adventure which has the characteristics of trade his
purpose or object cannot prevail over it. But if his acts are equivocal his purpose or object may be very
material.

The acquisition of an asset with the intention of making a profit on the resale does not inevitably signify an
adventure in the nature of trade since whether a person is hoping to carry out a deal or hoping to make a
good investment some capital appreciation is anticipated. The time at which resale is foreseen is of greater
importance.

However, if the taxpayer argues that it was not his intention to make a profit through resale the onus is on
him to produce some plausible explanation for his purchase, such as that he intended to enjoy the income
before reselling. Further, the taxpayer’s assertion that he intended to buy an asset for investment purposes,
whether as an investment fund for old age or as a hedge against devaluation will not be allowed to stand
against other facts. The Revenue thus get the best of the best of both worlds; the taxpayer’s state of mind can
make up for equivocal acts while unequivocal acts cannot be distorted by intent.

If there is no prospect of immediate profit through resale this may suggest that the acquisition is not an
adventure in the nature of trade. However, whatever the taxpayer’s original intention may have been that
may change.

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The individual

Where a single transaction is involved and is of a nature close to, but separate from, what is undoubtedly a
trade carried on by him, it is likely that the courts will conclude that the transaction is an adventure in the
nature of a trade. See, T. Beynon Ltd v. Ogg.

The second way in which the individual may become important is if he possesses some special skill. There is
some authority that if a person has a skill and makes money by it, the profit is more likely to be taxable but
today the absence of a skill appears to be natural.

a. The subject matter

The courts take the view that some commodities are more likely to be acquired as investments than as the
subject of a deal. For instance, land is asset which can easily yield taxable profits. If one owns a house and lives
in it, the house is unlikely to be trading stock. However occupation is not conclusive and courts are reluctant
to disturb a finding by the Commissioners that there was an adventure in the manner of trade. In Page v.
Pogson the taxpayer had built a house for himself and his wife and then sold it six month after completing it.
He then built another house and Upjohn, J. felt himself unable to reverse that finding although doubting
whether he would have reached that decision himself.

b. Processing – Supplementary work

The alteration of the asset by the taxpayer may suggest that there is an adventure in the nature of trade. So if
a purchaser were to carry through a manufacturing process which changed the character of the article, as
where pig-iron is converted into steel, there is likely to be a trade, but merely to put the asset into a condition
suitable for a favourable sale, such as cleaning a picture or giving a boat a general overhaul, would not suggest
a trade. See, IRC v. Livingstone

Realization – Reasons

“Some explanation, such as a sudden emergency or opportunity calling for ready money, negatives the idea
that any plan of dealing prompted the original purchase.”

a. Realization – Machinery

The presence of an organization through which the disposal of the asset is carried out is one of the hall marks
of a trade, not least because the expenses of such an organization will be deductible in computing the net
profit on the deal. Equally another factor in deciding whether or not a trade has been discontinued is whether
the trade organization has ceased to exist in an identifiable form. However the presence or absence of an
organization is anything but conclusive in deciding whether or not there has been an adventure in the nature
of trade. As Lord Wilberforce said in Ransom v. Higgs: “organization as such is not a principle of taxation, or
many estimable ladies throughout this country would be imperiled.” Thus in West v. Phillips where the
taxpayer built certain houses for letting and subsequently set up an estate agency business run by a separate
company for the purposes of selling the houses that action was regarded as simply a convenient method of
realizing investment property consisting of a large number of component parts. On the other hand, in Hudson
v. Wrigthson where the appellant was a retired druggist who had bought some houses and later sold them but

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had never had an office or staff, the Commissioners concluded that there was a trade and their decision was
not reversed.

b. Realization – The number of steps

The number of steps taken to dispose of the asset is a fragile indicator of a trade. The purchase of goods in
bulk and their resale in smaller quantities is the essence of a wholesale – retail trading operation. So in Cape
Brandy Syndicate v. IRC one of the factors in favour of a trade was that the brandy was disposed of in some
100 transactions spread over 18 months. On the other hand the fact that a large number of disposals of land
occurred did not make them trading transactions in Hudson Bay Co v. Stevens.

Conversely a single disposal can nonetheless amount to an adventure in the nature of trade.

Frequency of transactions

The frequency of transactions is only one factor; an investor is still an investor even though he changes his
investments. In J. Bolson & Son Ltd v. Farrelly where the taxpayer company ran a passenger service but bought
a large number of boats in a short time for the service and resold them after modification, Harman J agreed
that the Commissioners’ finding that there was trade was inevitable. He said, “A deal done once is probably
not an activity in the nature of trade, though it may be. Done three or four times it usually is. Each case must
depend on its own facts.”

However while it is clear that repeated transactions may support the adventure in the nature of trade and that
an isolated transaction many nonetheless be an adventure in the nature of trade, there is also authority that
where a transaction is repeated the court may use that fact to place the label of trade on to the original
transaction.

See, Leach v. Pogson.

Duration of ownership

A long period between the acquisition of an asset and its disposal may corroborate an intention to hold it as
an investment. Conversely, a quick sale invites a scrutiny of the evidence to see whether the acquisition was
with that intent. One element of an investment is that the acquirer intends to hold it at any rate for some
time, with a view to obtaining either some benefit in the way of income in the meantime or obtaining some
profit, but not an immediate profit by resale.

See, Earmes v. Stepnell Properties Ltd.

Timing

It is a question of fact not only whether there is an adventure in the nature of trade but also when it begins –
and ends. Where an asset is acquired and subsequently disposed of, it is open to the court to conclude from
the evidence that the whole transaction was an adventure in the nature of trade. It is however open to the
courts to conclude that an asset was acquired with the intention of retaining it as an investment but that

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trading subsequently commenced so that the profit accruing on resale will be taxable. What is clear is that at
any one time the asset must either be trading stock or a capital asset; it cannot be both.

In computing the profit where the trade is begun subsequently to the asset being acquired, the asset must be
brought into the account at its market value at that time.

Sales by personal representatives and liquidators

A personal representative may be empowered to carry on the deceased’s business by the terms of the will,
however his acts may amount to carrying on a trade for the purposes of Schedule D, Case I whether or not
there is such a power. If he is held to be trading this liability to tax is his and not qua executor. As personal
representative his job is to realize the assets of the estate and distribute them among the beneficiaries. There
is therefore a presumption that if all he did was to realize the asset in a way advantageous to the estate then
he was not carrying on a trade.

Whether the acts amount to carrying on a trade is a matter of degree and must depend on the nature of the
trade, as two cases concerning farming show.

See, Pattullo’s Trustees v. IRC, and compare with IRC v. Donaldson’s Trustees.

Liquidation

Like the personal representative, the liquidator’s duty is to realize the assets. Here too the courts ask the
question: what reason is there to suppose that the winding up was done for any purpose other than the
normal carrying out of the duties of a liquidator? There is a presumption that a mere disposal is not a trading
operation. In Wilson Box (Foreign Rights) Ltd v. Brice the company was formed to turn patent rights to
account. However no trade of dealing in patents was commenced. During liquidation certain patent rights
were sold. The Special Commissioners held that there was a trading operation but the Court of Appeal held
that there was no evidence to support this. On the other hand the payment to the liquidator of sums in
respect of trading contracts made before the date of liquidation will be trading receipts.

Retirement

To dispose trading stock after announcing one’s retirement may well be trading, since the moment when
trade ceases is a question of fact. Declarations by the trader are not of themselves decisive. In J. and
R.O’Kane Ltd v. IRC the taxpayers had carried on the business of wine and spirit merchants. They announced
their intention to retire in early 1916 but did not complete the disposal of their stock until late 1917, an
operation which was carried out mostly in 1917 and which took the form of many small sales. The only
purchases made for the business after the announcement of their retirement were under continuing contracts
with distillers. The Special Commissioners held that the trade did not end in early 1916 and that the proceeds
of the disposal sales were therefore taxable as the profits of the trade. The House of Lords held that there was
abundant evidence for the Commissioners’ findings.

On the other hand, IRC v. Nelson there was only a twelve day gap between the decision to retire and the
disposal of the stock, and the whole stock was sold together with the rest of the business, the casks, the trade
name and office furniture and fittings in one sale to one customer. The Commissioners held that the disposal
was not by way of trade and the Court of Session held that there was evidence to support the conclusion.

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Where however it is clear that trading has ceased, subsequently disposals will escape income tax. Thus in
Beams v. Weardale Steel Coal and Coke Co Ltd the company’s iron works had shut down by 1915. In 1933 they
sold off some slag heaps and the Commissioners held this was not a part of their trade. It was not suggested
that this was a new trade. The Revenue’s appeal was dismissed.

Mutual business

It is necessary to distinguish a profit from a trade from an excess of contribution over expenditure. If I allow
myself N100 a week for housekeeping but spend only N90, no one would contend that the N10 saved was
taxable profit. The immunity of the N10 from tax rests on two principles, either of which is sufficient; the one
is that no man can trade with himself and the other is that the sum does not represent a profit.

The mutuality principle has been used to exempt a local authority from liability to tax on its rates but today its
scope is limited to mutual insurance companies, institutions like the BBC and members’ clubs.

It is however essential that such companies should be mutual companies, that is one where only the policy
holders are the members of the company. If the company has shareholders who do not hold life policies but
who are entitled to the profits of this business the company is not a mutual company. Nevertheless, the
mutuality doctrine is not without its limits. First, as just indicated, it applies only to the mutual dealings
between the contributors. See, New York Life Assurance Co. v. Styles.

Secondly, the doctrine applies only if there is genuine mutuality. See, Fletcher v. IRC.

Thirdly, as Municipal Mutual Insurance v. Hills showed, not all business between a company and its members
is mutual business. A business cannot escape tax on its profits for a year simply because at the end of the year,
it discovers that all its business has been with its members but its principal function is as a mere entity for the
convenience of its members.

See also, English and Scottish Joint Co-operative Wholesale Society Ltd v. Assam Agricultural ITC
Another test is to decide whether any gains or profits accruing are concerned with fixed or circulating capital.
If concerned with the former, the gains or profits are not taxable, if the latter, then they are. (see John

Smith and Son v. Moore (1991) 12 T.C. 266 at p. 282; J. & R. O’Kane & Co. v. C.I.R. (1992) 12 T.C. 303). This
distinction is accepted commercially and normally observed in a properly prepared balance sheet.

The scope of this charge to tax, it will be appreciated, is a wide one for if profit making activity is not caught
for tax as a trade it may yet be chargeable as a business, profession or vocation. It was held by Finlay
J. in St. Aubyn’s Estate Ltd. v. Strick (1932) 17 T.C. 412 at pages 418 – 419, that the word “business” is wider in
its scope than “trade” and therefore it is arguable that the charge to tax under the P.I.T.A. is very wide.

Definition of Employment

Sections 3(2)(d) of P.I.T.A. 2004 defines employment as including “any service rendered by any person in
returns for any gains or profits.” The term “employment” signifies something in the nature of a “post”. Where
a person works for more than one employer, it is often a difficult question whether there are a number of
separate employments or whether the employments are mere vocation. Where the activities of the taxpayer
do not consist of obtaining a post and staying in it but consist of a series of engagements treated as carrying
on a profession. In Fall v. Hitchin, it was held that the word “employment” is conterminous with the words
“contract or service” and that income derived by a ballet dancer from a contract with a theatre having the

23
attributes of a contract of service was taxable, notwithstanding the fact that the dancer carried on a
profession as such and entered into the contract in the normal course of carrying on that profession. This
decision narrows the scope of Davies v. Braithwaite to contracts entered upon in the course of carrying on a
profession which are contracts for services.

Difference between employment and engagement on contract

Employment is a contract of service while a contract is a contract for service. Employment can be brought to
an end at the discretion of the employer by following the provisions of the contract of service signed with the
respective employee. While a contract will normally come to an end when their service is completed or
delivered.

Revenue Income versus Capital Income and Revenue Expenditure versus Capital Expenditure

Revenue income is income derived from normal course of business and which comes on a regular basis as a
result of the activities of the business. It is income derived from trading or manufacturing activity. It can also
be income from a regular business provided by the business to its various customers. Revenue income also
includes income from investment such as interest, dividend, rent, etc which are expected to re occur on a
yearly basis as long as the investment is held. While capital income arises from disposal of a capital asset or an
investment. For tax purposes, capital income is not taking into consideration in the determination of income
chargeable for income tax but it is chargeable to tax under the capital gains Act

Revenue expenditures are expenditures made for operating the day-to-day activities of the business. These
are expenditures that occur on a regular basis for conducting the operational activities of the business. They
include purchase of trading stocks or raw materials for manufacturing, salaries and wages, carriage, electricity,
etc. Items of expenditure which are incurred for enhancing the operational efficiency of fixed assets such as
repairs and maintenance, renewals, painting, etc,. The benefit generated by the revenue expenditure only
lasts for the current accounting year. Capital expenditures are expenditures incurred on capital assets or
acquisition of investments. They also include expenditures to enhance the capacity of the assets to generate
revenue or increase their useful lives. The benefits of capital expenditure usually last beyond the current years
and run for many years. Whereas, capital expenditures are not allowed for deduction before arriving at
chargeable income, however, capital allowance is allowed as deduction before arriving at chargeable income.
The rate of capital allowance for each type of capital asset is stated in the tax law and it runs through the tax
life of the asset.

Computation for Tax Purposes of the Profits of Trade

a. Accountancy principles

One of the greatest problems in the ascertainment of the full amount of the profits or gains of the trade is the
role of accountancy practice. It is clear that the aim of the accountant is in some senses the same as that of
the Revenue – both are seeking to measure the income of a precise – and so an artificial – period. It is also
clear that the mere fact that an accountant or his employer wishes to charge a particular expense to capital or
revenue will not be sufficient to determine its status at law. While the ordinary principles of commercial
accounting must, as far as is practicable, be observed, income tax law must not be violated.

There are two distinct approaches to the relationship between questions of law and principles of
accountancy. One asserts that the court should first look to see what accountancy says and then see whether
any rule of law contradicts it; the other that the court should first determine the question as a matter of law

24
and then see whether accountancy gives a different answer and then determine which should prevail. It will
be appreciated that the former gives much greater weight to accountancy practice than the latter.

Tax law and accountancy practice conflict in a number of ways. First it is an elementary accountancy principle
that capital expenditure on a depreciating asset must be written off over the lifetime of the asset. However
the tax law allows the deduction of capital expenditure only that expenditure falls within Capital Allowances
system. Again prudent accountancy practice writes off abortive expenditure as a revenue expense but for law
abortive capital expenditure is not deductible.

b. Assessment of Profits of a Trade

The Act does not define “profits” and so it should be given its ordinary meaning. The Oxford English Dictionary
defines it as “the pecuniary gain in any transaction; the amount by which value acquired exceeds value
expended; the excess of returns over the outlay in capital.”

Various judicial pronouncements have been made as to the meaning of “profits.” For example, in Mersey
Docks and Harbour Board v. Lucas, the Board was required to pay its surplus income into a fund after making
expenses and interest charges. The question was whether such surplus was profit assessable to tax. It was
held by the House of Lords that:

“the word ‘profits’ as here used means the incomings of the concern after deducting the expenses
of earning and obtaining them before you come to the application of them…It is exactly the same
thing as if there had been a declaration that after paying the current expenses and all other out
goings…the clear surplus of the profits and gains of the undertaking should be applied in a certain
manner…”

In Russell v. Town & Country Bank, Lord Herchell defined “profits” as:

“the surplus by which the receipts from the trade exceed the expenditure necessary for the purpose
of earning those receipts…”

For assessment of profits there are three elements to be considered, and these are:

(a) Receipts; (b) Payments; and (c) Adjustments.

Determination of Residence

The word “reside” is not statutorily defined, and it is clear that it has no technical or special meaning. Thus,
the determination of the residence of an individual in a tax case will be made in accordance with the ordinary
meaning of that word. That meaning was considered by Viscount Cave L.C. in Levene v. I.R.C. “My Lords, the
word, ‘reside’ is a familiar English word and is defined in the Oxford English Dictionaries as meaning ‘to dwell
permanently or for a considerable time, to have one’s settled, or usual abode, to live in or at a particular place.’

The question whether an individual is or is not resident in a particular year of assessment is a question of
degree and therefore one of fact; that general principle and its necessary corollary are to be found in the
judgment of Lord Buckmaster in I.R.C. v. Lysaght:

The determination of an individual’s residence must be made for each relevant year of assessment. However,
the court may have regard to the tax payer’s conduct in years both previous, and subsequent to, the year of
assessment in question in considering whether the tax payer was resident in that year. Viscount Sumner
enunciated that general principle in Levene v. I.R.C. as follows: 10

25
“It is suggested that the Commissioners misdirected themselves in point of law because they took into
account, with regard to earlier years, conduct which only occurred subsequently. I agree that the taxpayer’s
chargeability in each year of charge constitutes a separate issue even though several years are included in
one appeal, but I do not think that any error of law is committed if the facts applicable to the whole of the
time are found in one continuous story.” The rules for the determination of residence are contained in the
First Schedule of the Personal Income Tax Act of 2004. See, paragraphs 1 – 10 of the First Schedule to the Act.

Domicile

People are domiciled where they have or are deemed by law to have their permanent home. They must have
a domicile, but may not have more than one. “Domicile or origin” is the domicile which the law attributes to
every individual at birth. If a child is legitimate, this is the domicile of the father at the date of the child’s birth;
if the child is illegitimate, this is the domicile of the mother.

“Domicile of Choice” is the domicile which people may acquire by leaving the country their domicile or origin
and taking up residence in another country with the intention of making their permanent home there.
However, until there is both the intention to change the domicile and also the establishment of residence in
the new territory, the domicile of origin remains. Mere length of stay in a county is not sufficient to establish a
domicile of choice in that country. A domicile of choice is acquired by the combination of residence and
intention of permanent or indefinite residence. Thus, civil servants, missionaries and other persons whose
domicile or origin was in one of the constituent States of Nigeria and who reside abroad for vocational or
business reasons, even for the greater part of their lives, retain that domicile unless they have abandoned the
intention of ultimately returning to live in the country of their domicile or origin and have formed the definite
settled intention of taking up permanent residence in the particular country in which they reside.

Change of domicile

The domicile or origin continues until a domicile of choice is acquired. On the other hand, a domicile of choice
is lost by departure from the country of such domicile without the intention of returning there to live; in that
event, the domicile of origin revives unless and until a new domicile of choice is acquired. The onus of proof of
abandonment of the domicile of origin is upon those who seek to establish the acquisition of a domicile of
choice, and very strong evidence is required for this purpose.

Recognition of earnings

One area where the dividing line between the interaction of accountancy and legal principles in determining
profit is particularly unclear is the recognition of earnings. A simple account of receipts and payments is
unlikely to be acceptable on accountancy principles or to the FIRS except to a diminishing extent in the case of
certain professions, where a cash basis of accounting may still be accepted subject to certain restrictions. That
aside, it is important to distinguish between the principle that profits and losses cannot be anticipated and the
fact that profit (and losses) may be earned before a cash payment is received. If a profit has been earned, it is
not anticipated by being included in the accounts before cash is received.

Accountancy practice provides its own rules for the recognition of profit. These are governed by two of the
“fundamental” accounting concepts, the “accruals:’ concept and the “prudence” concept. The former states
that revenue and costs shall be recognized as they are earned or incurred rather than as cash is received or
paid. They are also, so far as possible, matched with one another and dealt ‘within the accounting period to
which they relate. The prudence concept deals separately with profits and losses. It states that revenue and

26
profits should be included in the accounts only when realized (i.e. they should not be anticipated) but that
provision should be made for all known expenses and losses. The concept of prudence prevails where there is
any conflict with the accruals concept but the recognition of future losses can cause conflict with taxation
principles.

PROFIT MEASUREMENT AND REPORTING

Accounting profit is calculated based on revenues and related costs of doing business. There are
several components that go into calculating accounting profit. Gross profit is the difference between
revenue and cost of sale, or cost of producing the goods. Companies subtract all other expenses from
gross profit to arrive at accounting profit before tax expenses.

Operating expenses include rent, utilities, interest, depreciation, amortization, salaries and other
day-to-day costs of running the business. In the accrual method and the matching principle is
followed in reporting accounting profit. This principle ensures that the income generated by an
output and the expenses incurred for that output are recognized in the same period whether they
were paid for or not during the period.

Each company is allowed under the law to select the date for its financial reporting, i.e. its accounting
period which may differ from the Government fiscal year. Corporate financial reporting are required
to follow accounting standards that have been set by independent accounting standard body. The
purpose of these standards is to ensure uniformity of companies’ financial statements and
accounting methods.

However, tax rules are contained in tax laws as promulgated by the country’s legislature and are
mostly different from requirements of accounting standards. Therefore, it is possible for the
financial reports of a company to differ from the tax returns submitted to tax authority because of
the different accounting methods.

The tax law contains provisions on allowable and disallowable expenses for tax purpose. Whereas, as
long as these expenses are incurred for the purpose of generating the income being reported, they
are taking into consideration before arriving at the accounting profit.

The gap or difference between book and tax income generally results from three categories of
differences:
i. Temporary differences;
ii. Permanent differences; and
iii. Loss carry forwards / carry backs.

Temporary differences are defined by the accounting standard as being differences between the
carrying amount of an asset (or liability) within the statement of Financial Position and its tax base,
i.e., the amount at which the asset (or liability) is valued for tax purposes by the relevant tax
authority.

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Permanent differences occur as a result of differences between income as reported in the financial
statement and income as reported based on tax law, as a result of some expenses that are
disallowed for tax purposes but included in the determination of income in the financial statement.
Also, there are some expenses and or income reported on the tax return which are never reported
on the income statement.

FISCAL YEAR

Fiscal year is a period of twelve months that begins at any date other than January for which a business has
decided to prepare its business financial statements. Each business is permitted under the tax law to
determine its own fiscal year which is otherwise known as accounting year. Some businesses have adopted
the calendar year as their fiscal year. In Nigeria, the Government fiscal year is the same with the calendar
year, i. e. 1st January to 31st December. Each business organization is expected to render a tax return within
each of the Government fiscal year as prescribed by the provisions in the various tax laws.

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CHAPTER 3

TAXATION OF INCOME / PROFITS

The Charge of Income Tax

“Income tax, if I may be pardoned for saying so, is a tax on income….” This famous aphorism of Lord
Macnaghten has been frequently quoted, usually out of its proper context. If, however, one includes in the
expression “income,” for the purposes of the taxing statutes, those accretions to wealth which the statutes
specially provide shall be so treated, whether or not such items would normally be regarded as “income,” then
the statement is broadly true. Income tax is a tax upon that which is properly regarded as “income” for the
purposes of the appropriate taxing acts, that is to say “taxable income.”

There is no complete definition of income to be found anywhere in the Nigerian legislation but various rules
are laid down for computing receipts liable to tax, and the decisions of the courts contribute to the law on the
subject. Income tax is not a tax on capital and thus one of the major concerns of the Acts and of the tax cases
is the distinguishing of capital from income. In Aderawos Timber Trading Company Ltd v. Federal Board of
Inland Revenue,3 the appellant received 30,000 Nigerian pounds from a company called African Timber and
Plywood (Nig.) Ltd. as a result of an agreement for concession to fell timber from the land on which the
appellant had licence. The agreement included another amount to be paid per cubic foot of the area of
concession.

The appellant had originally treated the 30,000 Nigerian pounds as rent and apportioned it over 5 years, and
paid 7,000 Nigerian pounds tax on it for 3 years of assessment, 1962/63 to 1964/65, to the respondent.
Subsequently, the appellant sought to treat the 30,000 Nigerian pounds as capital and demanded the refund
of the 7,000 Nigerian pounds tax paid, from the respondent.

The appellant contended that the receipt was a windfall by way of sale of capital and not profit as it was to
secure an agreement over a certain period. The respondent contended that since the company was in
business of selling timber, all the receipt in that respect should be revenue receipt.

The Supreme Court held that:

a) The lump sum payment was derived from the trading activity of selling timber which constitutes a trading
receipt and not capital.

b) Appeal dismissed.

The scope of the charge to tax is outlined in the P.I.T.A.2004, s.3 and the C.I.T.A. 2004 (as amended in 2007)
s.9. Tax is payable for each year of assessment upon all income or profits from a source inside or outside
Nigeria accruing in, derived from, brought into, or received in, Nigeria.

See, section 3 of P.I.T.A. 2004.

See also, section 3 of C.I.T.A.

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Taxation of dividends paid by Nigerian companies

Dividends under P.I.T.A. section 3 (2) (e) (i) and (ii) means: -

in relation to a company not being in process of being wound up or liquidation, any profits distributed
whether such profits are of capital nature or not, including an amount equal to the nominal value of bonus
shares, debentures or securities awarded to the shareholder, and

in relation to a company that is being wound up or liquidated, any profits distributed, whether in
money or money’s worth or otherwise, other than those of a capital nature earned before or during
the winding up or liquidation.

Under P.I.T.A. section 12:

i. The income from a dividend from a dividend distributed by a Nigerian company, shall be deemed to
be derived from Nigeria and shall be the gross amount of that dividend before the deduction of any
tax which the company is required to deduct on payment therefore under the provisions of any law in
force in Nigeria at the relevant time imposing taxation on the profits of companies.

ii. Any amount of undistributed profit of a Nigerian company which is treated as distributed under the
provisions of any law in force in Nigeria imposing tax on the profits of companies shall, for the
purpose of this Act be deemed, to be income from a dividend accruing to any person who is

iii. a shareholder in the company in proportion to his share in the ordinary capital thereof at the relevant
time, and the income for the dividend be taken for assessment in his hands shall be his due
proportion thereof increase by such amount as my be specified by the relevant tax authority in
respect of tax deemed to be deducted at source.

iv. The income from a dividend distributed by a Nigerian company shall be deemed to arise on the day on
which payment of that dividend becomes due.

Section 13 P.I.T.A. provides that the income from a dividend paid by a company other than a Nigerian
company, or from any other source outside Nigeria, shall be the amount of that income brought into or
received in Nigeria, provided that, if the income arose in a country to which section 39 of this Act applies,
the amount of that income to be taken for assessment shall be the amount under subsection (5) of section
39 of this Act.

Also, section 15 P.I.T.A. states that where a dividend or interest is distributed or paid by a Nigerian
company, the dividend or interest as the case may be, whenever necessary for the purpose of the First
Schedule to the Act, shall be deemed to be derived from the territory in which the recipient of the
dividend or interest, resides or, where the recipient id not resident in Nigeria, the person shall be a person
to whom section 2 (1) (b) (iv) applies.

Income Exempted from Tax

Section 19 P.I.T.A. states that:

i. There shall be exempt from the tax that income specified in the Third Schedule to this Act.

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ii. The minister may by notice include in the Third Schedule to this Act all or any person or class of
persons chargeable to tax by virtue of this Act, so that person or class of persons from tax in
pursuance of:

a. any treaty, convention or agreement between the Federal Government of Nigeria and any other
country or any arrangement with or decision of an international organization of which the Federal
Government of Nigeria is a member; or

b. any arrangement in that behalf subsisting between the government of the Federal and the
Government of each State.

iii. Nothing in this section or the Third Schedule to this Act shall be construed so as to:

a. exempt in the hands the recipients, any interest bonuses, salaries or wages paid wholly or in part
out of income exempted thereby; or

b. authorize a state Government, a company or any person or agency or Government, a company or


any person whether resident or not in Nigeria to provide tax exemption clauses in an agreement
or arrangement without seeking approval first from the Minister of Finance and Economic
Development and thereafter from the National Council of Ministers.

QUALIFYING EXPENDITURE

Qualifying expenditure means capital expenditure incurred in a basis period in connection with:

a. Plant, machinery or fixtures;


b. Building, structures or works of a permanent nature;
c. Mines, Oil wells or other sources of mineral deposits of a wasting nature;
d. Plantations;
e. Research and Development;
f. Agricultural Plant;
g. Public Transportation Motor Vehicles; and
h. Public Transportation (inter-city) New Mass Transit Coach.

However, any expenditure which is an allowable deduction in computing the profits of the company’s trade or
business in accordance with the provisions of Section 24 of CITA shall not be treated as qualifying expenditure.

ASSETS ACQUIRED ON HIRE PURCHASE

For assets acquired under a hire – purchase agreement, the qualifying expenditure of such asset is the amount
of cash element included in the installment paid by the hirer during the relevant basis period. This means,
interest elements are not to be included since this is allowable as business expenditures in section 24 of CITA.

CAPITAL ALLOWANCES

Capital Allowance is defined as “a form of tax relief granted to companies under the tax law for the wear and
tear on business assets in realization that money spent on assets being used in generating income are
deductible expenses” (Teju Tax page 191).

In our discussions on deductions not allowed in arriving at assessable profits, we included two major
expenditures, that is:
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a. Depreciation; and
b. Expenditure of capital nature.

Depreciation is the written off of the cost of an asset in use in business over its useful life. I.A.S 4 describes it
as the allocation of the depreciable amount of asset employed in a business over its useful life. This is an
important business expense but it is disallowed in the determination of assessable profit because the cost of
an asset is written off into the profit and loss accounts at different rates by different companies as a result of
differences in accounting policies adopted by companies.

However, since real business profit cannot be properly determined without providing allowances for wear and
tear of capital assets, all Income Tax Acts (PITA, CITA, PPTA) provides that capital allowances be granted in
place of depreciation. Provisions for capital allowances were detailed in the 5th schedule of PITA and 2nd
schedule of CITA.

TYPES OF CAPITAL ALLOWANCES

There are four types of allowances. These are:

1. INITIAL ALLOWANCE
This is granted in the first year of acquisition on the cost of purchase of the asset whether purchased
new or second hand. This allowance is claimed when the qualifying capital expenditure is first put into
use. The allowance is granted in accordance to the rates prescribed under the tax laws for each
classes of qualifying capital expenditure. And the allowance is granted only once on the qualifying
capital expenditure.

2. ANNUAL ALLOWANCE
This is granted annually and is computed on the balance of the cost after deducting the amount of
initial allowance claimed on the asset. It is calculated on straight line basis, that is, it will be the same
amount for each year of the tax years of the asset. The applicable rate for each class of asset is
prescribed under the second schedule of CITA. A nominal value of N10 per item of asset is however,
retained in the books in the last year of claim of annual allowance and it will be retained until the item
is disposed of.

Where the basis period for any year of assessment is a period less than one year, the annual
allowance for that year of assessment shall be proportionately reduced.

3. BALANCING ADJUSTMENT
This is the third type of allowance and it could be a charge, depending on the situation. It arises when
a qualifying capital expenditure is disposed off. The idea is to bring the allowances in line with the
actual expenditure. Where the sales proceed is less than the tax written down value at the time of
disposal a balancing allowance is obtained. Balancing allowance is deducted from assessable profit in
a similar manner as both initial and annual allowances. On the other hand, where the sales proceed is
more than the tax written down value at the time of disposal a balancing charge is obtained. The
balancing charge is required as an additional taxable income. But in subjecting balancing charge to
tax, it is limited to the maximum capital allowance previously claimed on the asset prior to disposal.

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The maximum capital allowance claimed is the difference between the original cost of acquisition and
the tax written down value at the time of disposal. The excess balancing charge will however, be
subject to Capital Gains Tax.

4. INVESTMENT ALLOWANCE
In addition to an initial allowance, investment allowance can be claimed in respect of qualifying
expenditure incurred on plant and machinery. The rate is 10% of the expenditure. The provision of
CITA relating to initial allowance also apply to investment allowance, except that an investment
allowance is not to be deducted from cost of the asset in arriving at the residue upon which annual
allowance is to be calculated.

5. RURAL INVESTMENT ALLOWANCE


This is an allowance granted in addition to initial allowance to a company sited at least 20 kilometres
away of facilities provided by the Government such as electricity, water, tarred roads etc. for the
purpose of trade or business and has provided that the Government failed to provide.

The allowance was introduced in 1992 to encourage investment in rural areas of Nigeria.

The rates of rural investment allowance are as follows:

a. no facility at all 100%


b. no electricity 50%
c. no water 30%
d. tarred road 15%

CAPITAL ALLOWANCES RATES

The following are the current capital allowances rates:

INITIAL ALLOWANCE ANNUAL ALLOWANCE


% %
Building (Industrial and non Industrial) 15 10
Mining 95 Nil
Plant: Agricultural Production 95 Nil
Others 50 25
Furniture and Fittings 25 20
Motor Vehicles: Public Transportation 95 Nil
Others 50 25
Plantation Equipment 95 Nil
Housing Estate 50 25
Ranching and Plantation 30 50
Research and Development 95 Nil

Students should however, note that:


a. In respect of qualifying plant and machinery expenditure for the replacement of the old ones, a one –
off 95% capital allowance in the first year shall be allowed, the 5% book value shall be retained until
the final disposal of the asset.

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b. A company engaged in gas utilization (downstream operation) shall be granted accelerated capital
allowance after the tax – free period of three years as follows:
i. an annual allowance of 90 percent with 10 percent retention, for investment in plant and
machinery; and
ii. an additional investment allowance of 15 percent which shall not reduce the value of the
asset.

BASIS PERIOD FOR CAPITAL ALLOWANCES

The basis period for capital allowances is normally the same with the one used in the computation of
assessable profit. For example, if a company makes up its accounts to 30 th June every year, the basis period
for the purpose of determining assessable profits for 2016 assessment year will be the accounting year ended
30th June, 2015, i.e., 1st July 2014 to 30th June, 2015. Capital allowances would be claimed for 2016
assessment year using the same basis period as follows:
- Initial allowances: on assets purchased during 1st July 2014 to 30 June, 2015.

- Annual Allowance: on tax written down value of the company’s assets at 3oth June 2014 plus
the annual allowance on additions to assets during the year, 1st July 2014 to
30th June, 2015. If there are disposals in the year, the tax written down value
of such disposal will be eliminated from the tax written down value as at 30th
June, 2014 before the annual allowance is calculated.

This rule will however, be disrupted at commencement and cessation of a business as well as if there is a
change in the accounting period. This will cause an overlapping and or gaps of periods during these occasions.

The provisions of the Act in respects of the above are:


i. Where two bases periods overlap, the period common to both is treated except for the purpose of
annual allowances, as falling to the first basis period only;
ii. Where two bases periods coincide, they shall be treated as overlapping and therefore, rule (i) above
will be applicable.
iii. Where there is an interval between the end of the basis period for one year of assessment and the
basis period for the next year of assessment, the interval shall be treated as part of the second basis
period unless the year of assessment based on the second basis period is the year of permanent
cessation of the trade, when the interval is treated as part of the first basis period.

PRACTICE QUESTIONS

3.1 Sadet Nigeria Limited commenced business on 1st December 2010. Accounts are made up to 28th
February of every year.

The company’s accounts have been prepared as follows


1/12/2010 to 28/2/2011 3months
1/3/2011 to 28/2/2012 12months
1/3/2012 to 28/2/2013 12months

Required:
i. What are the basis periods for assessment?
ii. What are the basis periods for capital allowances?

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SOLUTION TO Q3.1

i. The basis periods for assessment are:

2010 Assessment year 1/12/2010 to 31/12/2010 I month


2011 Assessment year 1/12/2010 to 30/11/2011 12 months
2012 Assessment year 1/12/2010 to 30/11/2011 Preceding year.

ii. The basis period for capital allowances purposes shall be as follows:

2010 Assessment year:


Initial Allowance - Based on the assets acquired during the period: 1/12/2010 to 31/12/2010
Annual Allowance - Based on assets in use at 1/12/2010 which is the same as assets acquired during the
period 1/12/2010 to 31/12/2010

2011 Assessment year:


Initial allowance - 1/1/2011 to 30/11/2011. Rule (i) above applies for 2010 and 2011 assessment year
here.
Annual Allowance - Based on residue for 2010 plus or minus acquisition or disposal in the period 1/1/2011
to 30/11/2011.

2012 Assessment year:


Initial Allowance - Nil. Rule (ii) above applies to 2010 and 2011 assessment years. The necessary initial
allowance would have been claimed in 2010 and 2011 assessment years.
Annual Allowance - Based on the tax written down value for 2011.

2013 Assessment year:


Initial Allowance - 1/12/2011 to 28/2/2012. Period 1/3/2011 to 30/11/2011 has already been treated
above. Rule (i) applies.
Annual Allowance - Based on the tax written down value for 2012 minus disposal during the period
1/12/2011 to 28/2/2012, if any. Annual allowance will also be calculated and claimed
for assets acquired during the period 1/12/2011 to 28/2/2012.

2014 Assessment year:


Initial Allowance - 1/3/2012 to 28/2/2013. No overlapping or gap.
Annual Allowance - Based on the tax written down value for 2013 minus disposal during the period
1/3/2012 to 28/2/2013, if any. Annual allowance will also be calculated and claimed
for assets acquired in the period – 1/3/2012 to 28/2/2013.

Student should note that it is only in cessation that gaps can arise and then rule (iii) above will apply.

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RESTRICTIONS TO CAPITAL ALLOWANCE

Students should note the following two restrictions:


a. Unutilized allowances in the year of permanent cessation of a trade or business carried on by a
company shall be available for relief against the reminder of its assessable profits for the proceeding
years of assessment and so on for other proceeding years up to the fifth year before the year of
permanent cessation; and
b. The amount of capital allowances calculated and deductible for any year of assessment is generally
restricted to 662/3% of the assessable profits.

However, company in the agro-allied industry or that which is engaged in the trade or business of
manufacturing is not affected by this restriction.

ASSETS ON LEASE

I.A.S 17 defines a lease as “an agreement whereby the lessor transfer to the lessee in return for rent the right
to use an asset for an agreed period of time.

There are two types of leases. These are finance lease and operating lease. In case of finance lease, the lease
is normally over the useful life of the asset and rewards and risks of ownership are substantially transferred to
the lessee. Therefore, the lessee is entitled to claim capital allowances normally allowed to owners of such
equipment.

However, in the case of an operating lease, the property reverts back to the lessor after the period of lease. It
is the lessor that bears the risks of ownership. It is the lessor that continue to show the asset as its own in its
books, depreciating them and will therefore, claim all capital allowances on them.

Rental paid by the lessee are allowable expenses in arriving at assessable profit but only if the leased asset is
used wholly, exclusively, necessarily and reasonably for its business. Additional expenditure properly incurred
on the maintenance of the leased asset is also an allowable expenditure.

36
VALUE ADDED TAX
Introduction

Value Added Tax (VAT) is a consumption tax chargeable on the supply of taxable goods and services
other than those specifically stated as exempted.

The law that introduced Value Added Tax (i.e. VAT) in Nigeria is known as Value Added Tax Decree
102 of 1993 which was promulgated on August 24, 1993. It became effective on January 1, 1994. It
repealed and replaced the then existing Sales Tax (ST) Decree No. 7 of 1986 (CAP 192) which was
then a State Tax.

In the year 2001, the Board of Internal Revenue as a department of the Lagos State Ministry of
Finance informed the general public that the Sales Tax Law Cap 175 Law of Lagos State of Nigeria
1994 which was amended by the Sales Tax (Schedule Amendment Order 2000) on selected luxury
items is still in force and listed 11 taxable Goods and services which are currently being taxed under
the Federal Government promulgated VAT laws.

It is a consumption tax that is imposed on all VATtable goods and services at the rate of 5%.

VAT is made up of three important attributes. These attributes are:

a. VAT is a consumption tax;


b. VAT is a multi-stage tax; and
c. The incidence of VAT is on the final consumer.

The concept of VAT introduction in Nigeria was fall out of the report of the Study Group set up by the
Federal Government of Nigeria in 1991 to review the entire Nigerian tax system.

Imposition of Value Added Tax - Section 1 of the VAT Act Cap VI LFN 2004 (As amended)

There is hereby imposed and charged a tax to be known as the Value Added Tax (VAT) which shall be
administered in accordance with provision of the VAT Act.

Taxable Goods and Services - Section 2 of the VAT Act Cap VI LFN 2004 (As amended)

VAT shall be charged and payable on the supply of all goods and services (in the VAT Act referred to as
“taxable goods and services”) other than those goods and services listed in the First Schedule to the VAT Act.

Goods and Services Exempt from VAT -

Section 3 of the VAT Act states goods and services exempt from VAT Act. These goods and services are:

Good Exempt – First Schedule (Part l)

a. All medical and pharmaceutical products;


b. Basic food items;

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c. Books and educational materials;
d. Baby products;
e. Locally produced fertilizer, agricultural and veterinary medicine, farming machinery and farming
transportation equipment;
f. All exported goods;
g. Plant and machinery imported for use in the Export Processing Zone;
h. Plant, machinery and equipment purchased for utilization of gas in downstream petroleum
operations; and
i. Tractors, ploughs, agricultural equipment and implements purchased for agricultural purposes.

Services Exempt – First Schedule (Part ll)

a. Medical services;
b. Services rendered by Community Banks, People’s Bank and Mortgage Institutions;
c. Plays and performances conducted by educational institutions as part of learning: and
d. All exported services.

Zero Rated Goods and Services – First Schedule (Part lll)

Certain goods and services are classified as Zero rated. These are

a. Non-oil exports;
b. Goods and services purchased by diplomats; and
c. Goods purchased for use in humanitarian donor funded projects.
“Humanitarian donor funded projects” include projects undertaken by Non-Governmental
Organizations and religious and social clubs or societies recognized by law whose activity is not for
profit and in the public interest.

Value of Taxable Goods and Services - Section 5 of the VAT Act Cap VI LFN 2004 (As amended)

1. For the purpose of this Act, the value of taxable goods and services shall be determined as follows,
that is:

a. If the supply is for a money consideration, its value shall be deemed to be an amount which with
the addition of the tax chargeable is equal to the consideration; and

b. If the supply is for a consideration not consisting of money, the value of the supply shall be
deemed to be its market value.

2. Where the supply of taxable goods or services is not the only matter to which a consideration in
money relates, the supply shall be deemed to be such part of the consideration as is properly
attributed to it.

3. For the purpose of this Act, the open market value of supply of taxable goods or services shall be
taken to be the amount that would fall to be taken as its value under subsection (1)(b) of this section if
the supply were for such consideration in money as could be payable by a person in a transaction at
arm’s length.

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Value of imported goods - Section 6 of the VAT Act Cap VI LFN 2004 (As amended)

The value of imported taxable goods for the purposes of this Act shall be the amount which is equal to the
price of the goods so imported and shall include:-

a. all taxes, duties and other charges levied either outside or by reason of importation into Nigeria,
other than the tax imposed by this Act;

b. all costs by way of commission, parking, transport and insurance up to the port or place of
importation.

Administration of the Value Added Tax - Section 7 of the VAT Act Cap VI LFN 2004 (As amended)

1. The tax shall be administered and managed by the Federal lnland Revenue Service Board (in this Act
referred to as "the Board").

2. The Board may do such things as it may deem necessary and expedient for the assessment and
collection of the tax and shall account for all amounts so collected in accordance with the provisions of
this Act.

Registration - Section 8 of the VAT Act Cap VI LFN 2004 (As amended)

1. A taxable person shall, within six months of the commencement of the Act or within six months of the
commencement of business, whichever is earlier, register with the Board for the purpose of the tax.
2. Without prejudice to the provisions of section 32 of this Act, a taxable person who fails or refuses to
register with the Board within the time specified in subsection (1) of this section shall be liable to pay
as penalty an amount of
a. ₦10, 000 for the first month in which the failure occurs; and
b. ₦5, 000 for each subsequent month in which the failure continues.

Registration by Government Ministries, etc., as agents of the Board - Section 9 of the VAT Act Cap VI LFN
2004 (As amended)

a. Every Government Ministry, statutory body and other agency of Government shall register as agents
of the Board for the purpose of collection of tax under this Act.

b. Every contractor transacting business with a Government Ministry, statutory body and other agency of
the Federal, State or local government shall produce evidence of registration with the Board as a
condition for obtaining a contract.

Registration by non-resident companies - Section 10 of the VAT Act Cap VI LFN 2004 (As amended)

1. For the purpose of this Act, a non-resident company that carries on business in Nigeria shall register
for the tax with the Board, using the address of the person with whom it has a subsisting contract, as
its address for purposes of correspondence relating to the tax.

2. A non-resident company shall include the tax in its invoice and the person to whom the goods or
services are supplied in Nigeria shall remit the tax in the currency of the transaction.

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Records and accounts - Section 1 of the VAT Act Cap VI LFN 2004 (As amended)

A person who is registered under Section 8 of this Act (in this Act referred to as "a registered person") shall
keep such records and books of all transactions, operations, imports and other activities relating to taxable
goods and services as are sufficient to determine the correct amount of tax due under this Act.

Returns, Remittances, Recovery and Refund of Tax

Payment of tax by taxable person - Section 12 of the VAT Act Cap VI LFN 2004 (As amended)

1. A taxable person shall pay to the supplier the tax on taxable goods and services purchased by or
supplied to the person.

2. The tax paid by a taxable person under subsection (1) of this section shall be known as input tax.

Remission of tax collected by Government Ministries, etc. - Section 13 of the VAT Act Cap VI LFN 2004 (As
amended)

1. Every Ministry, statutory body or other agency of Government shall, at the time of making payment to
a contractor, remit the tax charged on the contract to the nearest local Value Added Tax office.

2. The Service may, by notice, determine and direct the companies operating in the oil and gas sector
which shall deduct V A T at source and remit same to the Service.
3. The remission shall be accompanied with a schedule showing the name and address of the contractor,
invoice number, gross amount of invoice, amount of tax and month of return.

Tax invoice - Section 13A of the VAT Act Cap VI LFN 2004 (As amended)

1. A taxable person who makes a taxable supply shall, in respect of that supply, furnish the purchaser
with a tax invoice containing, inter alia, the following::-

a. tax payers identification number;


b. name and address;
c. VAT registration number;
d. the date of supply;
e. name of purchaser or client;
f. gross amount of transaction; and
g. tax charged and rate supplied.

2. A tax invoice shall be issued on supply whether or not payment is made at the time of supply.

Collection of tax by taxable person - Section 14 of the VAT Act Cap VI LFN 2004 (As amended)

1. A taxable person shall on supplying taxable goods or services to his accredited distributor, agent,
client or consumer, as the case may be, collect the tax on those goods or services at the rate specified
in section 2 of this Act.

2. The tax collected by a taxable person under subsection (1) of this section shall be known as output tax.

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Taxable person to render returns - Section 15 of the VAT Act Cap VI LFN 2004 (As amended)

1. A taxable person shall render to the Board, on or before the 21st day of the month following that in
which the purchase or supply was made, a return of all taxable goods and services purchased or
supplied by him during the preceding month in such manner as the Board may, from time to time,
determine.

2. A person who imports taxable goods into Nigeria shall render to the Board returns on all the taxable
goods imported by him into Nigeria.

3. In this regard, any payment made to duly authorized Government agents shall be deemed to have
been made to the Federal Inland Revenue Service.

Remission of tax - Section 16 of the VAT Act Cap VI LFN 2004 (As amended)

1. A taxable person shall, on rendering a return under subsection (1) of section 15 of this Act:-

a. if the output tax exceeds the input tax, remit the excess to the Board; or
b. if the input tax exceeds the output tax, be entitled to a refund of the excess tax from the Board on
production of such documents as the Board may, from time to time, require.

2. An importer of taxable goods shall, before clearing those goods, pay to the Board the tax on those
goods.

Allowable input tax, etc. - Section 17 of the VAT Act Cap VI LFN 2004 (As amended)

1. For purposes of section 13 (1) of this Act, the input tax to be allowed as a deduction from output tax
shall be limited to the tax on goods purchased or imported directly for resale and goods which form
the stock-in-trade used for the direct production of any new product on which the output tax is
charged.

2. Input tax:-
a. on any overhead, service, and general administration of any business which otherwise can be
expended through the income statement (profit and loss accounts); and

b. on any capital item and asset which is to be capitalized along with cost of the capital item and
asset, shall not be allowed as a deduction from output tax.

Effect of failure to render returns - Section 18 of the VAT Act Cap VI LFN 2004 (As amended)

1. Where a taxable person fails to render returns or renders an incomplete or inaccurate returns, the
Board shall assess, to the best of its judgment, the amount of tax due on the taxable goods and
services purchased or supplied by the taxable person.

Effect of non-remittance of tax - Section 19 of the VAT Act Cap VI LFN 2004 (As amended)

1. If a taxable person does not remit the tax within the time specified in section 15 of this Act, a sum
equal to five per cent per annum (plus interest at the commercial rate) of the amount of tax

41
remittable shall be added to the tax and the provisions of this Act relating to collection and recovery
of unremitted tax, penalty and interest shall apply.

2. The Board should notify the taxable person or his agent of the tax due together with the penalty and
interest and if payment is not made within thirty days of such notification, the Board may proceed to
enforce payment as provided in section 15 of this Act.

Recovery of tax - Section 20 of the VAT Act Cap VI LFN 2004 (As amended)

1. Any tax, penalty or interest which remains unpaid after the period specified for payment may be
recovered by the Board through proceedings in the Value Added Tax Tribunal.

2. A taxable person who is aggrieved by an assessment made on the person may file an objection to the
Federal Inland Revenue Service.

3. An appeal before the Federal lnland Revenue Service shall be determined within 30 days.

4. Appeal from the decisions of the Federal Inland Revenue Service shall be made to the Tax Appeal
Tribunal.

5. An appeal from the Tax Appeal Tribunal shall be made to the Federal High Court.

Value Added Tax Technical Committee

Establishment and composition of the Value Added Tax Technical Committee - Section 21 of the VAT Act Cap
VI LFN 2004 (As amended)

There is hereby established a committee to be known as the Value Added Tax Technical Committee (in this Act
referred to as "the Technical Committee") which shall comprise:-

a. a Chairman who shall be the chairman of the Federal Board of Inland Revenue;

b. all directors in the Federal Inland Revenue Service;

c. the legal adviser to the Federal Inland Revenue Service;

d. a director in the Nigerian Customs Service; and

e. three representatives of the State Governments who shall be members of the Joint Tax Board.

Functions - Section 22 of the VAT Act Cap VI LFN 2004 (As amended)

The functions of the Technical Committee shall be to-

a. consider all the tax matters that require professional and technical expertise and make
recommendations to the Board;

b. advise the Board on the duties specified in section 7 of this Act; and

c. attend to such other matters as the Board may, from time to time, refer to it.

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Offences and penalties

Furnishing of false document, etc.

A person who:-

a. produces, furnishes or sends for the purpose of this Act or otherwise makes use for that purpose of a
document which is false in any material particular; or

b. in furnishing an information to the Board, makes a statement which is false in any material particular,

is guilty of an offence and liable on conviction to a fine of twice the amount under declared.

Evasion of tax

A person who-

a. participates in; or

b. takes steps with a view to making evasion of the tax by him or any other person, is guilty of an offence and
liable on conviction to a fine of ₦30,000 or two times the amount of the tax being evaded, whichever is
greater, or to imprisonment for a term not exceeding three years.

Failure to make attribution

A person required to make an attribution, who-

a. fails to do so; or

b. having done so, fails to notify the Board, is liable to pay a penalty of ₦5,000.

Failure to notify change of address

A person who fails to notify the Board of any change of address within one month of such change, is liable to
pay a penalty of ₦5,000.

Failure to issue tax invoice

A person who fails to issue a tax invoice for goods sold or services rendered, is guilty of an offence and liable
on conviction to a fine of 50% of the cost of the goods or services for which the invoice was not issued.

Resisting, etc., an authorized officer

A person who:-

a. resists, hinders or obstructs or attempts to resist or hinder an authorized officer acting under section 39 of
this Act; or

b. fails to comply fully with any requirement made under section 39 of this Act; or

c. makes any statement in response to a requirement made under section 5 of this Act which is false or
incomplete; or

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d. procures or attempts to procure by any means any other person to act as aforesaid,

is guilty of an offence and liable on conviction to a fine of N I 0,000 or imprisonment for a term of six months
or to both such tine and imprisonment.

Issuing of tax invoice by an unauthorized person

A person who, other than-

a. a person registered under this Act; or

b. a person authorized to do so under this Act, issues a n invoice purporting to be attributable to tax, is guilty
of an offence and is liable on conviction to a tine of ₦l0,000 or imprisonment for a term of six months.

Failure to register

A taxable person who fails to register under this Act, is guilty of an offence and liable on conviction to a fine of
₦5,000 and, if after one month, the person is not registered, the premises where the business is carried on
shall be liable to be sealed up.

Failure to keep proper records and accounts

A taxable person who fails to keep records and accounts of his business transactions to allow for the correct
ascertainment of tax and filing of returns is liable to pay a penalty of ₦2,000 for every month in which the
failure continues.

Failure to collect tax

A taxable person, who fails to collect tax under this Act, is liable to pay as penalty 150% of the amount not
collected, plus 5% interest above the Central Bank of Nigeria rediscount rate.

Failure to submit returns

A taxable person who fails to submit returns to the Board, is liable to a fine of ₦5, 000 for every month in
which the failure continues.

Aiding and abetting commission of offence, etc.

1. An officer of the Board or any other person who aids or abets the commission of any of the offences under
this Act, is guilty of an offence and is liable on conviction to a fine of ₦50,000 or to imprisonment for a
term of five years.

2. Where a person's conduct during any specified period has involved the commission or omission by him of
anyone or more of the foregoing offences under this Act, then whether or not the particulars of the
offences are known, he shall, by virtue of this section, be guilty of an offence and liable to pay a fine of
₦10,000 or four times the amount of any tax that was, or was intended to be evaded by his conduct,
whichever is greater, or to imprisonment for a term not exceeding six months or to both such fine and
imprisonment.

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Offence by body corporate, etc.

Where an offence under this Act is committed by a body corporate or firm or other association of individuals:-

a. every director, manager, secretary or other similar officer of the body corporate; or

b. every partner or officer of the firm; or

c. every person concerned in the management of the affairs of the association; or

d. every person who was purporting to act in any capacity as aforesaid,

is severally guilty of that offence and liable to be proceeded against and punished for the offence in like
manner as if he had himself committed the offence, unless he proves that the act or omission constituting the
offence took place without his knowledge, consent or connivance.

Power of inspection - Section 39 of the VAT Act Cap VI LFN 2004 (As amended)

1. An authorized officer may at any time enter without warrant any premises upon which he has reasonable
grounds to believe that a person is carrying on business in order to ascertain whether this Act is being
complied with (whether on the part of the occupier of the premises or any other person), and on entry he
may carry out such inspections and make such requirements as may be specified by the Board.

2. Where an authorized officer enters any premises in exercise of the power conferred on him by subsection
(1) of this section, he may take with him such persons as he considers necessary for carrying out his
functions under this Act.

Distribution of revenue

Notwithstanding any formula that may be prescribed by any other law, the revenue accruing by virtue of the
operation of this Act shall be distributed as follows:-

a. 15% to the Federal Government;

b. 50% to the State Governments and the Federal Capital Territory, Abuja; and

c. 35% to the Local Governments:

Provided that the principle of derivation of not less than 20% shall be reflected in the distribution of the
allocation amongst States and Local Governments as specified in paragraphs (b) and (c) of this section.

Appointment of agent for manufacturer or importer – Section 41 of the Act Cap VI LFN 2004 (As amended)

1. The Board may, by notice in writing, appoint any person to be the agent of any manufacturer or importer
and the person so appointed shall be the agent of the manufacturer or importer for the purposes of this
Act.

2. An agent may be required to pay any tax which is or may become payable by the manufacturer or
importer from any money which may be held by him for, or due by or to become due by him to the

45
manufacturer or importer, as the case may be, and in default of such payment, the tax shall be
recoverable from him.

For the purpose of this section, the Board may require a person to give information as to any money, fund or
other assets which may be held by him for, or of any money due from him to a manufacturer or an importer.

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PRACTICE QUESTIONS

Q1. Zedco construction Limited commenced business on 3rd of August 2011, making up its accounts to 31st July
yearly. The schedule of asset acquired prior to commencement of the business is as shown below:

Description N
Tractors and Grader 8,500,000
Motor Vehicle for field operations 15,900,000
Construction site (Factory building) 18,000,000
Furniture, Fixtures and Fittings 1,200,000

The company won a contract and additional assets purchased were as follows:

Date of Purchase Description Number of items Cost


N
Nov 2011 Plant & Machinery 3 1,800,000
April 2012 Motor Vehicle 1 1,350,000
August 2012 Building 3 1,500,000
Jan 2013 Generator 1 600,000
June 2013 Factory extension 1 690,000
Nov 2013 Pick – up Van 2 1,200,000

Required:
a. Prepare the schedule of Capital Expenditure allocation and identify the Qualifying Expenditure based on
which capital allowances are claimable:
i. Normal basis of assessment; and
ii. Revised basis of assessment (based on tax payer’s right of election).
b. Explain the treatment of capital Expenditure acquired by Zedco construction limited prior to
commencement of business on 3rd August, 2011.
c. State the relevant tax years and corresponding basis period covered by the data above.

SOLUTION
a. i.
ZEDCO CONSTRUCTION LIMITED
SCHEDULE OF CAPITAL EXPENDITURE ALLOCATION AND
QUALIFYING CAPITAL EXPENDITURE ON NORMAL BASIS

Y.O.A BASIS PERIOD FOR BASIS PERIOD FOR QUALIFYING AMOUNT


ASSESSMENT QUALIFYING EXPENDITURE CAPITAL EXPENDITURE N

2011 3/8/11-31/12/11 3/8/11 -31/12/1 Tractor & Grader 8,500,000


Motor Vehicle for filed Operation 15,900,000
Construction site(Factory Building) 18,000,000
Furniture, Fixtures & Fittings 1,200,000
Plant & Machinery 1,800,000

2012 3/8/11- 31/7/12 1/1/12 -31/7/12 Motor Vehicle 1,350,000


2013 1/8/11-31/7/12 - - -

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2014 1/8/12- 31/7/13 1/8/12 – 31/7/13 Building 1,500,000
Generator 600,000
Factory Extension 690,000
2015 1/8/13- 31/7/14 1/8/13 -31/7/14 Pick–up Van 1,200,000

ii. REVISED BASIS (TAX PAYER’S RIGHT OF ELECTION)

Y.O.A BASIS PERIOD FOR BASIS PERIOD FOR QUALIFYING AMOUNT


ASSESSMENT QUALIFYING EXPENDITURE CAPITAL EXPENDITURE N

2011 3/8/11-31/12/11 3/8/11 -31/12/11 Tractor & Grader 8,500,000


Motor Vehicle for filed operation 15,900,000
Construction site (Factory Buildg) 18,000,000
Furniture, Fixtures & Fittings 1,200,000
Plant & Machinery 1,800,000
2012 3/8/11- 31/7/12 1/1/12 -31/7/12 Motor Vehicle 1,350,000
Building 1,500,000
2013 1/8/13- 31/7/13 1/1/13 – 31/7/13 Generator 600,000
Factory Extension 690,000
Pick–up Van 1,200,000

b. Assets acquired by Zedco Construction Limited before it commenced business would be deemed to have
been acquired on the first day of commencement of the new business.

c. The relevant tax years and corresponding basis period covered by (a) above are

i. Normal Basis
Y.O.A BASIS FOR ASSESSMENT
2011 3/8/11 – 31/12/11
2012 3/8/11 – 31/7/12
2013 -
2014 1/8/12 – 31/7/13
2015 1/8/13 – 31/7/14

ii. On the basis of right of election:


Y.O.A BASIS PERIOD FOR ASSESSMENT
2011 3//8/11 – 31/12/11
2012 1/1/12 – 31/12/12
2013 1/1/13 – 31/12/13

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CHAPTER 4

COMPUTATION OF TAX LIABILITY OF INDIVIDUALS

A person under various tax laws is defined as follows:


- A company or body of persons (section 84(1) of CITA);
- An executor, trustee, company, partnership, community, family and individual;
- A company or body corporate and any unincorporated body of persons – section 69, Interpretation,
FIRS Act;
- A company and any unincorporated body of persons – Part I Interpretation section of PPTA;
- For the purpose of VAT registration, a person includes:
i. Association
ii. Clubs and companies
iii. Charities
iv. Individuals; and
v. Partnership:
- A body corporate and unincorporated, a Government Ministry, department and Agency, a
Local Government, a Statutory Body, a Public Authority and other Institution, Organization,
Establishment and Enterprise which operates a Pay-As-You-Earn scheme – PAYE and (Rates,
etc, of Tax deducted at Source [WHT] Regulations – S.19 0f 1997);
- With respect to the Sales Tax Law, person includes an individual seller or supplier of
chargeable commodity – section 13, Interpretation section of Sales Tax Law Cap. S3 laws of
Lagos State.

However, under the personal Income tax law, only the following persons are subjected to tax under the
Personal Income Tax Act (PITA) Cap P8, LFN 2004 as amended:
i. Employees of companies earning salaries, wages, commission, etc;
ii. Directors of companies earning allowances, fees, and other remuneration;
iii. Partners in a professional firm of accountants, doctors, lawyers, secretaries, surveyors, etc; and
iv. Traders carrying on business in their names. These include enterprises, ventures unincorporated
companies, etc.

PERSONAL INCOME
This is defined under PITA as income of individual, group of individuals, proprietors, corporation sole
communities, families, trustees and executors who are residents in a state.

PERSONAL INCOME TAX


This is a tax that is imposed on individuals who are either in employment or are doing their own businesses
under any business name or partnership. The tax is based mainly on the incomes of persons, other than
incorporated companies, from trading, business, employment, trust and corporation sole.

The collection of Personal Income Tax is shared between the Federal and State Governments based on the
Personal Income Tax Act enacted by the National Assembly. Each State administers, assesses and collects
income tax of residents in the State while the Federal Inland Revenue Service, on behalf of the Federal
Government administers, assesses and collects income tax from residents in the Federal Capital Territory, staff
of the Ministry of Foreign Affairs, non-residents, the Military and the Armed Forces.

The subsisting principal Act is the Personal Income Tax Act (PITA) Cap P8, LFN 2004 as amended by the
Personal Income Tax (Amendment) Act 2011.
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CHAREGEABLE INCOMES

Chargeable incomes under the Act include:


a. Gains or profits from any trade, businesses, profession or vocation carried on by the chargeable
person;
b. Salaries, wages, fees, allowances or other gains or profits from employment including benefit – in –
kind;
c. Bonuses, premium or other perquisites granted to an employee;
d. Gains or profits including any premium arising from a right granted to any other persons for the use or
occupation of any property;
e. Dividends, interests or discounts; and
f. Any other profits, gains or other payments.

The following are excluded from taxation:


a. Re- imbursement to an employee for expenses incurred by him which does not contribute a profit or
gain;
b. Medical or dental expenses incurred by an employee;
c. Cost of passage to or from Nigeria incurred by an employee;
d. Any sum paid in respect to maintenance or education to a child; and
e. Any compensation for loss of employment.

INCOMES EXEMPTED FROM PERSONAL INCOME TAX.

The following incomes are exempted from the personal income tax:
a. All consular fees received on behalf of a foreign state or by consular officer or employee except where
the officer is a Nigerian, working in Nigeria;
b. An income in respect of which tax is remitted or exempted under the provisions of the Diplomatic
Immunities and Privileges Act;
c. The income of a Local Government or Government Institution;
d. The income of any ecclesiastical, charitable or educational institution of a public character;
e. Wound and disability pension granted to members of the Armed Forces or any recognized national
defense organization;
f. Pension granted to a person pursuant to any enactment or law for the time being in force.
g. The income of trade union, registered under the Trade Union Act;
h. Gratuities;
i. The income of Cooperative Society;
j. The income of a statutory or registered friendly society;
k. A sum withdrawn or received by an employee from a pension, provident or other retirement or other
benefits scheme, fund or society approved by the Joint Tax Revenue Service;
l. The income of a person other than a citizen of Nigeria from employment in technical assistance
scheme with the Government of the Federation or a State; and
m. Interest accruing to a person not resident in Nigeria. These interests are on Government loans from
international institutions, deposit accounts or transfers made wholly in foreign currencies, loans raised
in the United Kingdom.

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TYPES OF INCOME

There are two types of incomes; these are earned income and unearned income.

EARNED INCOME
Earned income are incomes derived from a trade, business, profession, vocation or employment carried on or
exercised by him. It means incomes that are earned through physical, intellectual or artistic exertion, as
opposed to those earned passively through investment. These include profits, salaries, wages, commissions,
bonuses, etc.

UNEARNED INCOME
These are incomes derived from sources other than employment, business or reward for services rendered.
These are incomes mainly from investments such as rental income, dividends, royalties, gifts, inheritance and
bequeathals.

RELIEFS
The following are the tax relief available under the Personal Income Tax (Amendment) Act, 2011;
a. A consolidated relief allowance of N200,000 subject to a minimum of 1% of gross income plus 20% of
the gross income;
b. Deduction made from income in respect of:
i. National Housing Fund contribution
ii. National Health Insurance Scheme
iii. Life Assurance Premium
iv. National Pension Scheme; and
v. Gratuities

TAX RATE
After deducting the various reliefs from the gross income, the balance, taxable income, is subject to tax based
on the following rates:

1. First N300,000 at 7 percent;


2. Next N300,000 at 11 percent;
3. Next N500,000 at 15 percent;
4. Next N500,000 at 19 percent ;
5. Next N1,600,000 at 21 percent; and
6. Above N3,200,000 at 24 percent.

MINIMUM TAX
PITA provides that every person must, however, pay a minimum tax of 1% of his income as personal income
tax.

Definition of Terms

“Assessable Income” refers to the income of an employee for each year of assessment from each and every
source of his income.

“Employment” includes any service rendered by any person in return for any gains or profits including
appointment or office, whether public or otherwise, for which remuneration is payable, and “employee” and

51
“employer” shall be constructed accordingly: the gain or profit from an employment shall be deemed to be
derived from Nigeria if the duties of the employment are wholly or partly performed in Nigeria, or the
employer is in Nigeria, whether the gains or profits are received in Nigeria or not.

“Emoluments” means total emoluments including all allowances, salaries, wages, perquisites, bonuses, and
compensation;

“Fringe Benefits or Benefits-in-kind” means benefits accruable to an employee when an:

1. Employer’s asset is put in the Employee’s use (For tax purposes, the deemed value of such benefit
accruing to the employee is 5% of the acquisition cost if known or 5% of the market value of the asset at
the time of acquisition);

2. Employer rents or hires an asset which he puts into the use of an employee (For tax purposes, the
employee will be charged with the difference between the amount incurred by the employers and any
amount refunded to the employer by the employee).

“Income Tax Reliefs” in relation to any year of assessment, means the sum of personal allowances and other
reliefs given to an employee in a year of assessment;

“Taxable Emolument” means emoluments reduced by tax-free emoluments;

“Tax Deduction Cards” means a tax deduction card in the form prescribed by the relevant tax authority or
such other document as may be authorized by the relevant tax authority.

“Total Income” means in relation to an individual for a year of assessment, his aggregate assessable income
for that year after the additions and deductions as allowed in the statute are factored in.

“Year of Assessment” means the period of 12 months commencing on the first day of January of a year.

Tax assessment and collection

There are two methods of collection and these are direct assessment and deduction at source. The former
consists of an assessment made by the Relevant Tax Authority of the total income for a year of a taxpayer and
thus also of the tax payable for that year. The latter method, of which P.A.Y.E. is the principal example, is more
sophisticated. Here the revenue authorities require the payer, in the case of P.A.Y.E. the employer, to deduct
an appropriate amount from each weekly or monthly installments of salary paid to an employee, in
anticipation of the employee’s tax liability for the whole year. This liability usually, month by month, or as the
case may be is ascertained from tax tables supplied to an employer on request.

Employers are required to make regular returns to the tax authorities in their areas. These returns are usually
monthly and should show the number of employees during the month, the total tax deducted and total
deductions paid into a Government Treasury.

The main advantage of the P.A.Y.E. system is that it reduces tax evasion since an employer is less likely to
evade his employee’s tax than the employees themselves would be if they had themselves to account for their
income. The system also enables much of administrative work and expense shifted onto the shoulders of
employers who are required to act as collectors for the Revenue.

Payment of Tax

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In the case of direct assessment tax is normally payable in two equal installments, the first within two months
of the date of service of the notice of assessment and the second not later than the fourteenth day of
December in the relevant tax year. The date of payment of the second installment varies from territory to
territory. Where tax is not paid by the due date, a penalty of 10 per cent of the tax is imposed and the
employer may also be liable to criminal sanctions.
Where the P.A.Y.E. system applies, tax is paid in installments deducted by the employer from salary payments.
If at the end of a tax year it is found that an under or over payment of tax has been made, this is easily put
right by a simple adjustment which will be reflected in a diminished or increased “pay packet” on the next
“pay day” and an adjustment in the code number.

Tax Returns
Also under section 44 P.I.T.A., a taxable person required by this Act to file a return of income shall in the
return calculate the amount of tax payable and under section 46, the relevant authority may give notice in
writing to a person when and as often as it thinks necessary requiring him to deliver within a reasonable time
limited by such notice fuller or further returns respecting any matter as to which a return is required or
prescribed by this Act.

When a taxpayer fails to make a return, an assessment will be made on the total income, which the taxing
authority to the best of its judgment, considers was received by the taxpayer during the year. Such an
assessment will tend inevitably to be arbitrary but that is the fault of the taxpayer. Similar action is taken
where a return is not accepted as correct.

Additional assessments may be made in respect of unassessed profits provided that the Revenue Act within six
year of assessment in question. Although where the failure to assess occurred as a result of the fraud, willful
default or neglect of the taxpayer, an additional assessment may be made at any time.

Offences, penalties and tax enforcement


In addition to the penalty for late payment of tax already mention, the C.I.T.A. and P.I.T.A. provide certain
other penal sanctions, for offences relating to income tax. The penalties include:

- Failure to comply with the requirements of a notice served on the taxpayer;

- Supplying incorrect information in relation to any matter or thing affecting the liability to tax of the
taxpayer or any other person or of a partnership;

- Failure to make a correct return when requested;

- The making of any false statements, returns, or the preparation of false accounts with a view to the
evasion of tax liability;

- The failure or refusal to pay tax.

The punishments for these offences vary and are rather detailed. There are wide powers given to the tax
authorities with leave of the court to compound offences.

Objections and Appeals

Under section 61 P.I.T.A.2004, a taxable person being aggrieved by an assessment to income tax made upon
him, having failed to agree with relevant tax authority in the manner provided in subsection (3) of section 58
of this Act, may appeal against the assessment on giving notice as provided in section 61 of this Act within

53
thirty days after the date of service of notice of the refusal of the relevant tax authority to amend the
assessment as desired.

Where no valid objection or appeal has been lodged under section 66 P.I.T.A. and within the time limited by
section 58 or 61 of this Act or where due notice has not been given of a further appeal against a decision of
the Appeal Commissioners or Judge, as the case may be an assessment as made, or agreed to under the
provisions of subsection (3) of section 58 of this Act determined under the proviso to that subsection or on
appeal, as the case may be, shall be final and conclusive for all purpose of the Act as regards the amounts of
the assessable, total income and the tax charged thereby.

Appeals from company assessments are made to the Appeal Commissioners and thence appeal lies to the
Federal High Court on a point of Law. Companies are expressly entitled to legal representation before Appeal
Commissioners. Where there is failure to object or appeal against an assessment or the decision of an appeal
committee within the stipulated periods the assessment becomes absolutely binding upon the taxpayer.4

TAXTION OF SOLE TRADERS

A sole trader is an individual who is in business, profession or vocation and is not trading under Limited
Liability Company. The incomes chargeable for an individual under Personal Income Tax Act include profit or
gain from business, profession or vocation. A sole trader includes a person who runs his trading business, a
legal practitioner who runs his own chamber, a chartered accountant who runs his own firm, an architect who
runs his own firm, etc. This includes traders from every market.

A sole trader is required by law to prepare an audited financial statement which forms the basis for
determining his or her profit / gain chargeable to tax in a particular year. However, the income chargeable to
tax is determined using the preceding year basis.

The income of a sole – trader is chargeable to tax under Personal Income Tax Act cap P8 LFN 2004 as amended
by Personal Income tax (amendment Act) 2011.

ALLOWABLE EXPENSES

The Act provides that before any expenses can be allowed in the determination of income chargeable to tax, it
must have been incurred mainly for the purpose of the trade or business. Such expenses must be wholly,
exclusively, necessary and reasonably incurred during the period.

The following are the allowable expenses under section 20 of Personal Income Tax Act, Cap P8, LFN 2004:

a. A sum payable by way of interest on money borrowed and employed as capital in acquiring the
income;
b. Interest on loans for developing an owner – occupied residential house;
c. Rent for the period, and premiums the liability for which was incurred during that period, payable in
respect of land or buildings occupied for the purpose of acquiring the income; and
d. Any expense incurred for repair of premises, plant, machinery or fixtures employed in acquiring the
income, or for the renewal, repair or alteration of any implement, utensil or article or article so
employed: provided that if the premises, plant, machinery, fixtures, implement, utensil or article are
used in part for domestic or private purposes, so much of the expenses as relates to such use shall not
be so deducted;
e. Bad debts incurred in any trade, business, profession or vocation, proved to have become bad during
the period for which the income is being ascertained, and doubtful debts to the extent that they are

54
respectively estimated to have become bad during the said period and not withstanding that such bad
or doubtful debts were due and payable prior to the commencement of the said period:
Provided that:
i. Where in any period a deduction under this paragraph is to be made as respect any particular
debt, and a deduction has in any previous period been allowed in respect of the same debt, the
appropriate reduction shall be the same debt, the appropriate reduction shall be made in the
deduction to be made in the period in question;
ii. All sums recovered during the said period on account of amounts previously written off or allowed
in respect of bad or doubtful debts shall for the purposes of this Act be deemed to be income of
the trade, business, profession or vocation of that period;
iii. It is proved that the debts in respect of which a deduction is claimed either where included as a
receipt of the trade, business, profession or vocation in the income of the year within which they
were incurred, or section 21 of this Act made in the course of normal trading, business,
professional or vocation operations;
f. A contribution or an abatement deducted from the salary or pension of a public officer under the
Pension Act or under any approved scheme within the meaning of that Act, and any contribution,
other than a penalty, made under the provisions of any Act establishing the Nigeria Social Insurance
scheme for employees throughout Nigeria;
g. A contribution to a pension, provident fund or other retirement benefits fund, society or scheme
approved by the Joint Tax Board;
h. Legal expenses that includes:
i. General legal advisory services;
ii. Retainer fees;
iii. Renewal of a short lease, not exceeding 50years; and
iv. Any cost of protecting or defending the business; and
i. Any other expenses that is wholly, reasonably, exclusively and necessarily incurred for the purpose of
the business.

DEDUCTIONS NOT ALLOWED

In section 21 of the Act, the following deductions shall not be allowed for the purpose of ascertaining the
income of any individual in respect of:

a. Domestic or private expenses;


b. Capital withdrawn from a trade, business, profession or vocation and any expenditure of a capital
nature;
c. Any loss or expense recoverable under an insurance or contract of indemnity;
d. Rent of or cost of repairs to any premises or part of premises not incurred for the purpose of
producing the income;
e. Taxes on income or profits levied in Nigeria or elsewhere except as provided in section 13 of the Act;
f. Any payment to a pension, provident, savings or widow’ and orphans’ society, fund or scheme, except
as permitted by paragraph (f) and (g) of subsection (1) of section 20 of this Act;
g. The depreciation of any asset;
h. Any sum reserved out of profits, except as permitted by paragraph (e) of subsection (a) of section 20
of this Act or as may be estimated by the relevant tax authority, pending determination of the
amount, to represent the amount of any expense deductible under the provisions of that section, the
liability for which was irrevocable incurred during the period for which the income is being
ascertained;

55
i. Any expenses of any description incurred within or outside Nigeria for the purpose of earning
management fees unless prior approval of an agreement giving rise to such management fees has
been obtained from the minister;
j. Any expense whatsoever incurred within or outside Nigeria as management fees under any agreement
entered into after the commencement of this paragraph except to the extent as the Minister may
allow;
k. Legal expenses including:
i. cost of acquiring a new lease, whether short or long;
ii. cost of renewing a long lease;
iii. cost of defending traffic offence; and
v. Cost of defending a tax appeal.
l. Any provision for doubtful debts of a general nature; and
m. Fines and penalties.

NON – TAXABLE INCOME

The following incomes are not taxable:

i. Profit on disposal of fixed assets. Also, loss on disposal of fixed asset is not taking into consideration in
arriving at chargeable income;
ii. Profit on the disposal of investment; and
iii. Reversal of income of previously disallowed expenses.

CAPITAL ALLOWANCE

Where a sole trader has qualified capital expenditure upon which capital allowance is claimable, capital
allowance is deductible from assessable profit as follows:

i. Capital allowance is restricted to two - third of assessable profit, except if the business is an
agricultural business; and
ii. Capital allowance is only claimable on qualifying capital expenditure used for the purpose of the
business or trade.

TREATMENT OF LOSSES

Under section 36, subsection (2), loss in trade, business, profession or vocation is deductible from the total
assessable income as follows:

a. An amount of a loss incurred during the year of assessment in the trade, business, profession or
vocation:
Provided that no such deduction shall be made unless it is claimed in writing within twelve months
after the end of the year of assessment;
b. The amount of loss which the relevant tax authority is satisfied has been incurred in trade, business,
profession or vocation during any year preceding the year of assessment which has not been allowed
against his assessable income of a preceding year:
Provided that:
i. In no circumstances shall the aggregate deduction from assessable income in respect of the loss,
exceed the amount of the loss;
ii. A deduction under this paragraph for any year of assessment shall not exceed the amount, if
any, of the assessable income included in the total income of that year of assessment, from the
trade, business, profession or vocation in which the loss was incurred.
iii. Any loss can only be carried forward for a period of four years before such loss lapses.

56
BASIS PERIOD

Section 23 to 25 of the Act set down provisions regarding basis period.

NORMAL BASIS PERIOD: The normal basis for determining assessable income is the preceding year basis,
except at the beginning of a new trade or business and cessation of trade or business.

NEW TRADES: Section 24 states that:

i. The first year of assessment is based on the income from the date of commencement to 31st
December of that year;
ii. The second year of assessment is the income for the first year of operation of the new trade or
business;
iii. The third year of assessment will follow the normal preceding year basis.

However, the individual carrying on the trade, business, profession or vocation is entitled, by giving notice in
writing to the relevant tax authority within two years after the end of the second year, to require that
assessable income both for the second and third year (but not only for one or other only of those years) shall
be income of the respective years of assessment – actual basis.

CESSATION OF TRADE: Where an individual permanently ceases to carry on a trade, business, profession or
vocation, his assessable income there from shall be:

i. As regards the year of assessment in which the cessation occurs, the amount of income of that year;
ii. As regards the year of assessment preceding that in which the cessation occurs, the amount of the
income as computed in accordance with the provisions of section 24 of this Act, or the amount of the
income of such year, whichever is greater, and shall not be deemed to derive assessable income for
such trade, business, profession or vocation for the year of assessment following that in which the
cessation occurs.

PARTNERSHIP ASSESSMENT

Partnership is formed where two or more sole traders joined together for the purpose of carrying on a trade,
business, profession or vocation. Technically, partnership can be defined “as a relationship subsisting
between two or more persons agreeing to carry on business in common with view to profit under some
arrangement for sharing of resultant profits or losses”1.

Arrangement for partnership business is usually guided by an agreement called “Deed of partnership” or
Articles of Partnership”. This document defines the rights, duties, interests and obligations of the partners.
Where no such agreement exists in a partnership, the one provided in the partnership Act 1890 is adopted and
partners will share profits or losses equally without any entitlement to salaries and interest or capital.

The partnership deed will usually spells out the following:

a. Each partner’s capital contribution;


b. Interest payable on each partner’s capital;
c. Salaries, if any, payable to each partner; and
d. Ratio for sharing profits or losses.

Computation of partnership income

57
The income of partners in a partnership is computed in accordance with the provision of the Personal Income
Tax Act, Cap P8, LFN 2004 (PITA), Section 8. This includes:

a. Any remuneration, i.e., salary;


b. Interest on capital;
c. Cost of passage to and from Nigeria wholly or mainly undertaken for the purpose of leave or
recreation; and
d. Share of profit or loss.

However, any partnership expenses referable to a partner which would have been private or domestic
expenses if incurred by the partner himself are to be added back to the partnership profit before arriving at
the computed income of the partnership.

CAPITAL ALLOWANCES

The computed capital allowance of the partnership is shared between the partners in the partnership in the
profit and loss sharing ratio. A partner’s share is then used to reduce his share of profit in order to obtain the
taxable income of the partner.

LOSS RELIEF

This generally follows the same principle applicable to a sole trader. Losses incurred by partnership business
are apportioned between the partners in the same way profit are apportioned. The provisions for loss relieve
then applied to individual partner’s share.

CHANGES IN PARTNERSHIP STRUCTURE

There are four changes that can take place in a partnership business, these are:

a. Admission of a new partner;


b. Death, retirement and resignation of an old partner;
c. Amalgamation of two or more partnership business; and
d. Conversion of partnership into a limited liability company.

a. ADMISSION OF A NEW PARTNER

On admission of a new partner, the new partner will be treated as commencing a new business and
therefore, the commencement rule will apply to his own total income from the partnership business.

The normal procedure is to determine the new partner’s share of:

- Profit from the time he joined according to partner’s profit sharing ratio; and
- Capital allowance of each partner in the agreed profit and loss sharing ratio from the time he joined.

The above will result in assessable income for the new partner. Then you determine the basis period for
assessable profit of the new partner under the commencement rule.

b. DEATH, RETIREMENT OR RESIGNATION OF A PARTNER

Where a partner dies resigns or retire, he will be deemed to have ceased business and cessation rule will
be applied in determining his assessable profit.

58
The procedure, like that of admission of a new partner is to determine the total income from the
partnership due to the partner up to the time of his death, resignation or retirement. Capital allowance
due for each partner, up to the time of death, resignation or retirement of the partner is also determined.
Form the above, the partner’s assessable income will be determined and then subject to tax based on the
cessation rules.

c. AMALGAMATION OF TWO OR MORE PARTNERSHIP

Where two or more partnership business amalgamates, neither commencement rule nor cessation rule
will apply. The new partnership will be treated as a continuing business. All qualifying expenditures
transferred to the new partnership will be deemed to have been transferred at their tax written down
value and will not give rise to any balancing adjustment. No initial allowance is claimable on the
transferred assets and in claiming annual allowance; cognizance must be taken of the unexpected tax life
of the qualifying capital expenditure transferred.

d. CONVERSION OF PARTNERSHIP INTO A LIMITED LIABILITY COMPANY

Where a partnership business decides to convert into a limited liability company, the partnership business
will be treated as having ceased and therefore cessation rule will apply to the partner’s income from the
partnership business up to the time of its conversion.

The new company that is formed, through the conversion, will be treated as starting a new business and
thus commencement rule will be applied in determine the assessable profit of the new business.

The transferring of qualifying capital expenditure from the partnership to the new company will be at
agreed values and balancing adjustments (either balancing charge or balancing allowance) will be
computed. This is the difference between the agreed values and tax written down value of the assets.

However, the new business – will not be allowed to claim initial allowance on the transferred qualifying
capital expenditures and annual capital allowance shall be based on the unexpired tax lives of the
qualifying capital expenditures.

Benefits In Kind

Benefits in kind popularly called BIK refers to earnings, in most cases from employment, other than in cash, as
part of compensation for services rendered. It also refers to benefits provided by a company or firm to a
directors or partner of that company or firm

It also means expense paid for using the company’s or firm’s money that one cannot claim as a legitimate
company expenditure.

Examples of benefits in kind are:

a. Provision of motor vehicle for an employee by an employer for his usage in the course of carrying out his
duties. The annual benefit in kind is equal to 5% of the cost or 5% of the market value of the motor
vehicle, whichever is higher. Where the vehicle is hired for the employee, the chargeable benefit in kind is
the amount paid for hiring the car.

59
b. Provision of accommodation for an employee by an employer for his usage in the course of carrying out
his duties. The annual benefit in kind is equal to 5% of the cost or 5% of the market value of the
accommodation, whichever is higher. Where the accommodation is a rented apartment, the actual rent
paid to the landlord is chargeable to benefit in kind.

c. Where support staffs are provided by the employer for the use of the employee, the salaries being paid to
the support staffs are treated as benefits in kind and added to the salary of the said employee for the
purpose of calculating his PAYE.

d. Provision of other assets such as generator, telephone and furniture, etc. to an employee by an employer.
The same treatment similar in all respects to that of motor vehicle shall apply.

PROCEDURES FOR OBTAINING TAX CLEARANCE CERTIFICATE

a. Any employee who wants a Tax Clearance Certificate (TCC) should submit an application for a TCC
accompanied with a certificate of payment and tax (Form H2) showing 3 years tax payment for the 3
preceding years.

b. A Tax Clearance Certificate will be issued to all employees on request subject to the return of annual Tax
Deduction Cards (TDC’s) and End of Year Returns for that year showing evidence of payment of tax for the
three preceding years.

c. The Tax office will issue a TCC within 14 days from the date of receipt of the application from an employee
or state reasons for denial.

d. Applications for Tax Clearance Certificates by employers on behalf of employees should be accompanied
by fully completed and certified Forms H2. Only the relevant tax offices are authorized to process such
applications

e. Such applications should reach the Tax Offices at least two weeks in advance of collection. Applications
must be accompanied by, among other basic requirements, the relevant tax returns in respect of these
employees

Please note that unless the above requirements are met, applications made will not be processed.

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PRACTICE QUESTIONS

Q4.1a In the provisions of the Personal Income Tax (Amendment) Act 2011, what is a gross emolument?

b Chief Daniel Kokoro retired from one of the Federal Ministries in December 2014. He was then
paid a gratuity of N2,500,000. On the 1st of January 2015 he secured employment with Teescot
Nigeria Limited as Finance Manager with a salary of N6,000,000 per annum. He is married with
four children. You gathered the following information for 2015 about his new employment:

a. His official car costs N5,00,000 in the open market;


b. The company pays an annual rent of N1.2m on his official residence;
c. He has a life assurance policy with Adobe Insurance Plc with N600,000 sum assured. His
monthly premium is N5,600;

d. He contributes 8% of his annual salary as pension under the Nigeria Pension Reform Act;
e. He has aged parents upon who he spends N60,000 per annum; and
f. His other statutory contributions are:

i. National Health Insurance Fund, N10,000 per month;

ii. National Housing Fund N150,000 per annum.

You are required to calculate his annual and monthly tax liabilities for 2015.

SOLUTION TO QUESTION Q4.1

a. Gross emoluments under the Personal income Tax (Amendment) Act, 2011 means wages, salaries
allowances, including benefits- in- kind (BIK), gratuities, superannuation and other incomes derived
solely by reason of employment.

b.
Chief Daniel Kokoro
Computation of Tax Liability for 2015 Tax Year

N N
Gratuity 2,500,000
Salary 6,000,000
Benefit-in-kind:
Official car (₦5m x 5%) 250,000
Official residence 1,200,000 1,450,000
Gross emolument 7,450,000
Less Reliefs:
Consolidated allowance
(N200,000+20% of 7,450,000) 1,690,000
Life assurance 67,200
Pension contribution (6,000,000x 8%) 480,000
National Health Insurance Contribution 120,000
National Housing Fund contribution 150,000
2,507,200
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Chargeable Income 4,942,800
Calculation of Tax payable:
₦ ₦
300,000 x 7% 21,000
300,000 x 11% 33,000
500,000 x 15% 75,000
500,000 x 19% 95,000
1,600,000 x 21% 336,000
1,742,800 x 24% 418,272
Annual Tax payable 978,272

Monthly tax deduction ₦(978,272 ÷12) = ₦ 81,522.67

Q4.2 Mr. Joel Ifesowapo is the Public Relation Manager of Sadet Plc. The following information has been
provided by Mr. Joel Ifesowapo in respect of 2014 tax year:
i. Salary, 1st January to 31st March, N250,000 per month;
ii. Salary, 1st April to 31st December, N300,000 per month;
iii. Transport allowance, N600,000 per annum;
iv. Rent subsidy, N900,000 per annum.
v. Statutory contributions:
- National pension scheme, 7½% of gross emoluments;
- National Housing Fund, 2½% of Basic Salary;
vi. Rental income received (Gross)

- 3/3/2013 15,000
- 9/8/2013 24,000
- 20/7/2012 18,000
- 2/12/2012 9,000
vii. Mr. Ifesowapo is married with five children, aged between 1 to 20years. All his children are still in
school and earned no income during the year;
viii. Mr. Ifesowapo paid an annual premium of N48,000 on his first son’s life assurance with a sum
assured of N500,000; and
ix. He has two dependant relatives living with him with no income of their own.

You are required to:

Calculate the income tax payable by Mr. Joel Ifesowapo for 2014 year of assessment.

62
SOLUTION TO Q4.2

Mr. Joel Ifesowapo


Computation of Tax Liability for 2014 Tax Year

N N
Gross Income:
Salary: (3 x 250,000) + (9 x 300,000) 3,450,000
Transport Allowance 600,000
Rent subsidy 900,000
Rental Income (15,000 + 24,000) 39,000
Gross Income 4,989,000
Deduct Reliefs:
Consolidated Allowance (N200,000+ 20% of N1,889,000) 1,197,800
National Pension contribution (7½% of N4,950,000) 371,250
National Housing Fund (2½% of N3,450,000) 86,250 1,655,300

Chargeable Income: 3,333,700


Income Tax Payable
300,000 x 7% 21,000
300,000 x 11% 33,000
500,000 x 15% 75,000
500,000x19% 95,000
1,600,000x21% 336,000
133,700x24% 32,088
592,088
Less WHT on rental Income (N39,000 x 10%) 3,900
Income Tax payable 588,188

Q4.3 Mr. Chukwu Odinaka has approached you, as tax consultant, to help him with his tax returns. He
availed you with the following information:

i. He has been working as a freelance writer on part –time basis for two newspaper houses since
2013 from where he receives income net of withholding tax.
ii. In 2014, he served as a temporary Public Relation Officer to a political party on part –time basis.
iii. On 2nd of January, 2015, he secured a full time employment as Manager (Public Relation) with
Thermo –Print Nigeria Limited on a gross salary of N9,600,000 per annum.
iv. Details of his gross income from 2013 to 2015 are as follows:

2013 2014 2015


N N N
Salary - - 9,600,000
Part –time writing 2,650,000 2,850,000 3,150,000
Public Relations - 1,650,000 -

v. Withholding tax of 10% has been deducted from all his part-time contract earnings before
payment was made to him. Incomes declared above on these are therefore net of tax.

63
Required

a. State the difference between employment income and part-time income.


b. Calculate the tax liability of Mr. Chukwu Odinaka for 2015 tax year.

SOLUTION TO Q4.3

a. Employment income can be defined as income earned from a contract of service while part-time income is
income earn from contract for service. Employment can be brought to an end at the discretion of the
employer by following the provision in the contract of service signed with the respective employee. Part -
time service will normally come to an end when the service is completed or delivered.

b.
Mr. Chukwu Odinaka
Calculation of Income Tax Liability for
2015 Tax Year

N N
Salary Income 9,600,000
Freelance writing income (3,150,000/90 x100) 3,500,000
Gross Income 13,100,000
Reliefs:
Consolidated Allowance: (N200,000+20% of N13,100,000) 2,820,000
Chargeable Income 10,280,000

Tax Payable:
N % N
First 300,000 7 21,000
Next 300,000 11 33,000
Next 500,000 15 75,000
Next 500,000 19 95,000
Next 1,600,000 21 336,000
Balance 7,080,000 24 1,699,200
Income Tax 2,259,200
Less WHT deducted – N(3,500,000 – 3,150,000) 350,000
Tax liability 1,909,200

Q4.4 Dr. David Adatan was employed as Technical Director by Tadex Engineering Nigeria Limited and
commenced work on 2nd January 2014.

He has provided the following regarding the terms of his employment:

2014 2015
N’000 N’000
Basic salary 6,300 7,200
Rent subsidy 1,500 1,500
Soft furnishing 600 600
Entertainment allowance 480 480

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Other benefits:
i. A company car with a market value of N5,000,000;
ii. Scholarship grant for his children in higher institution to the tune of N800,000,;

Dr. David Adatan has approached you, as tax consultant, to help him determine his income tax liability
for 2014 and 2015 and also process his tax clearance certificate.
He also supplied you with the following additional information:

2014 2015
N’000 N’000
i. Rental Income (Gross) 300 300
ii. Interest received from fixed deposit 50 60
iii. Dividend received (net) 27 54
iv. Life assurance premium paid 120 120
v. Contribution to National housing fund 2½% 2½%
vi. Contribution to National Pension Scheme 7½% 8%
vii. Contribution to national Housing Fund is based on his annual basic salary while contribution to
National Pension Scheme is based on his annual total emoluments.
viii. The sum assured on his life assurance policy is N2,400,000 while he spent N25,000 on repairs
to his property from where he got the rental income.
ix. He spent the sum of N240,000 per annum to maintain his aged mother.
x. The actual amount he paid in respect of personal income tax (PAYE) was N750,000 and
N840,000 in 2014 and 2015 respectively.

Required:
a. Determine the personal income tax payable for 2014 and 2015 tax years.
b. State the effect of previous payments on the tax payable.

SOLUTION TO Q4.4

Dr. David Adatan


Computation of Personal Income Tax Liability
For 2014 and 2015 Tax Year

2014 2015
N N N N
Basic salary 6,300,000 7,200,000
Rent Subsidy 1,500,000 1,500,000
Soft furnishing 600,000 600,000
Entertainment allowance 480,000 480,000
8,880,000 9,780,000
Benefit - in – kind:
Car (5% of the value) 250,000 250,000
Scholarship grant 800,000 1,050,000 800,000 1,050,000
9,330,000 10,830,000
Rental Income 300,000 300,000
Less Repairs 25,000 275,000 25,000 275,000
Interest received on fixed deposit 50,000 60,000

65
Dividend received - - .
Gross Income 10,255,000 11,165,000
Less Reliefs:
- Consolidated relief 2,245,000 2,433,000
-Life Assurance Premium 120,000 120,000
-Contribution to National Housing fund 157,500 180,000
-Contribution to National Pension 744,750 3,267,250 866,400 3,599,400
Taxable Income 6,987,750 7,565,600

Tax Payable: 2014 2015


N % N N
First 300,000 7 21,000 21,000
Next 300,000 11 33,000 33,000
Next 500,000 15 75,000 75,000
Next 500,000 19 95,000 95,000
Next 1,600,000 21 336,000 336,000
Balance (2014=3,787,750 x 24%)(2015= 4,365,600 x 24%) 909,060 1,047,744
1,469,060 1,607,744
Less Amount paid:
Paye (750,000) (840,000)
Withholding Tax on rent (10%) (30,000) (30,000)
Net income tax payable 689,060 737,744

b. Based on the computation above, Dr. David Adatan is advised to pay additional personal income tax of
N689,060 and N737,744 for 2014 and 2015 respectively.
The dividend received and withholding tax paid on it is ignored because withholding tax on dividend is
regarded as final tax on dividend income.

Q4.5 Tolu, Tayo and Tomi who are in partnership, have agreed to share profits and losses in the ratio 2:2:1
respectively. The results of the partnership operations for the year ended 31st December 2015
showed a loss of N450,000 after charging
Tolu Tayo Tomi
N N N
Salaries 150,000 180,000 300,000
Interest on Capital 25,000 35,000 20,000
Bonus 15,000 25,000 20,000
Depreciation charged during the year was N250,000.

Required:
Determine the assessable income of each partner.

66
SOLUTION TO Q4.5

Tolu, Tayo and Tomi in Partnership


Computation of Assessable Income for each Partner
2015 Tax Year

Tolu Tayo Tomi


N N N
Salaries 150,000 180,000 300,000
Interest on Capital 25,000 35,000 20,000
Bonus 15,000 25,000 20,000
Total 190,000 240,000 340,000
Share of Adjusted loss (80,000) ( 80,000) ( 40,000)
Assessable income for each partner 110,000 160,000 300,000

Workings
Wi Computation of Adjusted loss N
Loss as per account 450,000
Less depreciation 250,000
Adjusted loss 200,000

Wii Share of adjusted loss:


Tolu 2/5 x 200,000 = 80,000
Tayo 2/5 x 200,000 = 80,000
Tomi 1/5 x 200,000 = 40,000
200,000

4.6 You have been retained as tax consultant to the firm of Debolu, Edet, Chukwu and Co, a law firm
based in Lagos.
The information relating to the firm’s operation in 2015 are as follows:

a. The firm makes up its accounts up to 31st December of each year;


b. The following are extracts from the firm’s books for the year ended 31st December, 2015

Net profit for the year 1,500,000
Depreciation 350,000
Capital allowance for the year 275,000
Balancing allowance 75,000
Balancing charge 80,000
Profit on sales of fixed assets 85,000
Legal expenses for successfully defending one of the
partners professional misconduct 15,000
c. Other information:
i. The three partners are Debolu, Edet and Chukwu;
ii. Profit sharing ratio is as follows:
Debolu 2
Edet 2
Chukwu 1

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iii. Debolu and Chukwu received N20,000 each as interest on loan per annum;
iv. Salaries payable to each partner during the year are as follows:
Debolu N 150,000 per annum
Edet N 100,000 per annum
Chukwu N 100,000 per annum
v. Edet ceased to be a partner on 30th June 2015. Tope was admitted on 1st July 2015. Tope’s
salary was agreed to be N100,000 per annum. She is also entitled to N15,000 as interest
on capital per annum;
vi. Included in travelling expenses is the sum of N25,000 paid towards the annual vacation of
Debolu, the principal partner;
vii. On Tope’s admission in July, 2015 the profit sharing ratio changed to:
Debolu 10
Chukwu 7
Tope 3

Required:
a. Compute the Total income of each partner:
i. Prior to admission of Tope; and
ii. Post – admission of Tope.
b. State the basis period for the partners.

SOLUTION TO 4.6
Debolu, Edet and Chukwu & Co
Computation of Chargeable Income for each Partner
Before admission of Tope

Debolu Edet Chukwu


N N N
Income:
Share of profit (see working ii) 356,000 356,000 178,000
Salaries 75,000 50,000 50,000
Cost of travelling expenses 12,000 - -
Interest on loan 10,000 - 10,000
453,000 406,000 238,000
Balancing charge (see working iv) 16,000 16,000 8,000
469,000 422,000 246,000
Less capital allowance (working iii) 70,000 70,000 35,000
Income from Partnership 399,000 352,000 211,000

Debolu, Edet and Chukwu & Co


Computation of Chargeable Income for each Partner
Post admission of Tope

Debolu Chukwu Tope Total


N N N N
Income:
Share of profit (see working ii) 445,000 311,500 133,500 890,000
Salaries 75,000 50,000 50,000 175,000
Interest on loan 10,000 10,000 - 20,000

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Interest on capital - - 7,500 7,500
530,000 371,500 191,000 1,092,500
Balancing charge (see working iv) 20,000 14,000 6,000 40,000
550,000 385,500 197,000 1,132,500
Less capital allowance (working iii) 87,500 61,250 26,250 175,000
Income from Partnership 462,500 324,250 170,750 957,500

Workings

i. Determination of Adjusted Profit


N N
Net profit for the year 1,500,000
Add back:
Depreciation 350,000
Legal expenses 15,000 365,000
1,865,000
Less
Profit on sale of fixed assets 85,000
Computed Income 1,780,000

ii. Share of computed Income

Debolu Edet Chukwu Tope


N N N N N
Adjusted profit 1,780,000
Pre –admission
1/1/15-30/6/15 890,000
Share of profit (2:2:1) (890,000) 356,000 356,000 178,000 -
Post admission
1/7/15 – 31/12/15 890,000
Share of profit (10:7:3) (890,000) 445,000 - 311,500 133,500
Total 801,000 356,000 489,500 133,500

iii. Appropriation of capital allowances and Balancing allowances


Debolu Edet Chukwu Tope
N N N N N
Capital Allowance 275,000
Add balancing Allowance 75,000
350,000
Pre- admission
1/1/15 – 30/6/15 175,000
Share of profit (2:2:1) (175,000) 70,000 70,000 35,000
Post admission
1/7/15 31/12/15 175,000
Share of profit (10:7:3) (175,000) 87,500 - 61,250 26,250
Total 0 157,500 70,000 96,250 26,250

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Iv. Appropriation of Balancing Charge

Debolu Edet Chukwu Tope


N N N N N
Balancing charge 80,000
Pre-admission
1/1/15 -30/6/15 40,000
Share of profit (2:2:1) (40,000) 16,000 16,000 8,000 -
Post – admission
1/7/15 – 31/12/15 40,000
Share of profit (10:7:3) (40,000) 20,000 - 14,000 6,000
Total 0 36,000 16,000 22,000 6,000

b. The basis period for the partners is:

i. Existing old partners – preceding year basis

ii. Retired Partner:– cessation rule applies

iii. Existing new partner – commencement rule applies.

Q4.7 Abubakar, Kesington and Dideolu have been trading with profit sharing ratio of 4:4:2 respectively. The
profit declared for the year 2014 was N1,400,000 without taking into consideration the following:

Abubakar Kesington Dideolu


N N N
Interest on capital 50,000 40,000 54,000
Rent on residences 300,000 250,000 360,000
Salaries 480,000 - 360,000
The following expenses have been charged before arriving at the profit stated above:

Abubakar Kesington Dideolu


N N N
Domestic Servant wages 72,000 60,000 54,000
Personal travelling expenses 84,000 72,000 66,000
Chieftaincy title ceremony 106,000 - -

Other information:
i. Kesington is not a salaried partner but an employee of another company with a salary of N480,000 per
annum. He joined the company 15years ago and retired recently on the 31st December, 2014 with
a gratuity of N150,000. He is not married but has an aged parent who lives with him;
ii. Abubakar is married with two children who are below seventeen years;
iii. Dideolu is a married woman with five children within the ages of five and sixteen years; and
iv. Abubakar has a life assurance policy for which he pays a premium of N24,000 per annum.

Required:
Compute the tax liabilities of Abubakar, Kesington and Dideolu for the relevant year of assessment.

70
SOLUTION TO Q 4.7

ABUBAKAR, KESINGTON AND DIDEOLU


Computation of Tax liability for 2015 Year of Assessment

Total Abubakar Kesington Dideolu


N N N N
Net profit 1,400,000
Add:
Domestic Servant wages 186,000
Personal travelling expenses 222,000
Chieftaincy title ceremony 106,000
Adjusted profit 1,914,000
Deduct:
Interest on capital 144,000 50,000 40,000 54,000
Rent on residences 910,000 300,000 250,000 360,000
Salaries 840,000 480,000 - 360,000
Domestic Servant wages 186,000 72,000 60,000 54,000
Personal travelling expenses 222,000 84,000 72,000 66,000
Chieftaincy title ceremony 106,000 106,000 - -
Loss to be shared (494,000)
Share of loss 4:4:2 494,000 (197,600) (197,600) (98,800)
Income from partnership 894,400 224,400 795,200
Deduct Relief:
Consolidated Allowance 378,880 248,880 359,040
Premium on life Assurance 24,000 - - .
402,880 248,880 359,040
Chargeable income 491,152 - 436,160
Tax payable:
First N300,000 @7% 21,000 - 21,000
Balance 21,027 - 14,978
Minimum tax - 2,244 -- .
Tax payable 42,027 2,244 35,978

NOTE
Kesington retired on 31st December, 2014, his employment income in that year is not chargeable to tax during
2015 year of assessment since employment income is chargeable to tax on actual basis. And his gratuity is
exempted from tax.

Q 4.8 Mrs. Elizabeth Kokori has her business outfit where she sells clothing accessories in Lagos but resides
in Akute, Ogun State. The statement of comprehensive Income of her trading business for the year
ended 31st December, 2014 is as follows:

Elizabeth Kokori & Co


Comprehensive Income Statement
For the year ended 31st December 2014
N N
Gross profit 2,540,000
Profit on disposal of vehicle 50,200

71
2,590,200
Less: Expenses
General Administration 48,000
Staff salaries 208,500
Printing and stationary 28,000
Telephone and postage 29,750
Electricity 84,060
Entertainment 42,500
Vehicle repairs 68,300
Bank charges 9,850
Donations 15,500
Periodical and technical journals 4,500
Audit and accounting fee 58,500
Embezzlement and fraud 50,000
Repairs and renewals 48,300
Depreciation 18,500
VAT paid on equipment 3,050
Specific bad debt written off 15,320 732,830
Net profit 1,857,370
You are given the following additional information:
i. Legal expenses of N48,000, which was included in staff salaries related to capital items.
ii. Donations were to a local social club;
iii. The Inspector of Taxes has agreed with her that one quarter of the vehicle running cost relates to
personal use;
iv. Salary of N15,000 was paid to an unknown person;
v. Her cashier perpetrated 75% of the embezzlement;
vi. Office expenses of N45,000 was omitted from the accounts;
vii. Repairs and renewals comprised of:
N
Partitioning of new office 20,000
Repairs of printing machine 10,500
Repairs of office roof 18,300
48,300
viii. Capital allowance agreed with the tax office for the year was N58,500.

Required:
a. Compute the income tax payable for the relevant tax year.
b. State to which state the tax is payable.

SOLUTION TO Q4.8
a.
Mrs. Elizabeth Kokori
Computation of Adjusted profit
For the year ended 31st December 2014

N N
Net profit as per account 1,857,370
Add Back: disallowable items:
Legal expenses 48,000

72
Vehicle repairs 17,075
Salary paid to unknown person 15,000
Embezzlement (75% of N50,000) 37,500
Donation to unapproved body 15,500
Repairs and renewals 20,000
Depreciation 18,500
VAT paid on equipment 3,050 174,625
Deduct: Non taxable items:
Profit on disposal of vehicle 50,200
Deduct: allowable expenses omitted 45,000 (95,200)
Adjusted Profit 1,936,795

Mrs. Elizabeth Kokori


Computation of Income Tax Payable
For 2015 Tax year.
N
Adjusted profit 1,936,795
Less capital allowance 58,500
Gross Income 1,878,295
Less Reliefs:
Consolidated Relief allowance (20% of N1,878,295 +N200,000) 575,659
Chargeable income 1,302,636
Income tax payable:
First N300,000 @ 7% = 21,000
Next N300,000 @ 11% = 33,000
Next N500,000 @ 15% = 75,000
Balance of 202,636 @ 19% = 38,501
Tax payable 167,501

b. Mrs. Elizabeth Kokori is subject to tax under the Personal Income Tax Acts therefore, her tax is payable
to Ogun State as per residence rule.

Q4.9. Dr. Dele Olaolu has been in business for several years. He lives and carries over his business in Lagos.
His general income statement for the year ended 31st December 2015 is as shown below:

General Income Statement


For the year ended 31st December, 2015

N N
INCOME:
Net profit from Directorship 1,506,100
Agency and premium income 695,800
Rental Income 1,265,100
Income from trading 30,100
Profit on disposal of vehicles 90,000
3,587,100
General Admin. Expenses
Travelling 179,800
Staff salary 662,000

73
Printing and stationary 97,900
Telephone and postage 78,800
Electricity 72,700
Rent paid 24,000
Entertainment 416,400
Vehicle repairs and maintenance 184,000
Bank charges 42,200
Donations 41,800
Subscriptions 6,200
Periodical and technical journal 2,500
Audit and accountancy 63,000
General expenses 7,700 1,879,000
1,708,100
You are given other information as follows:
a. i. Legal expenses of N61,000 which was included in staff salary relate to capital items;
ii. Donations are paid to a local charity. No employee benefits from it;
iii. Dr. Olaolu has agreed with the Inspector of Taxes that one –eight of vehicles repair and
maintenance related to personal use;
iv. A salary of N18,120 was paid to an unknown person.
b. Leasehold rent receivable from plot 1,2,3and 4 of Dan road, some of the property yielding rent of
N92,400 and this has not been accounted for;
c. Allowable expenses of N88,500 have been omitted from the accounts.

Required:
Compute the adjusted profit of Dr. Olaolu for tax purposes.

SOLUTION TO Q4.9
Dr. Dele Olaolu
Computation of Adjusted Income
For 2016 Tax Year
N N
Net profit as per account 1,708,100
Add back disallowable expenses:
Legal expenses 61,000
Vehicle repairs and maintenance 23,000
Salary paid to unknown person 18,120
Donations 41,800
143,920
Add back: Rental income omitted 92,400
1,944,420
Deduct: non - taxable item:
Profit on disposal of vehicle 90,000
Deduct expenses omitted 88,500
Adjusted Profit 1,765,920

74
Q4.10 Chief Olu Ajulo is a trader in household wears. He has presented the following accounts in respect of
the year ended 30th September, 2014.

N N
Revenue 4,312,700
Cost of sale 1,794,800
Gross profit 2,517,900
Less operating expenses:
Staff salaries 556,300
Managing Director’s salaries 400,000
Rent 300,000
Telephone and electricity 179,400
Medical expenses 29,700
Donations 10,000
Bad debts 83,120
Legal expenses 24,000
Motor running expense 196,380
Repairs and maintenance 72,100
Rent of accommodation 150,000 2,001,000
Net operating Profit 516,900
You were given the following additional information:
a. Depreciation of N286,800 in respect of the business assets was included in the cost of sale;
b. Rent is in respect of the building owned by Chief Olu Ajulo. One third of the building is occupied by
the proprietor and his family members. The telephone and electricity bill should be similarly
apportioned;
c. The medical expenses was incurred on the senior brother of Chief Ajulo;
d. The analysis of bad debt shown in the account revealed the following:
N N
Loan to customer written off 6,000
Loan to staff written off 9,000
Balance c/d – specific debt 40,000
Balance c/d - general debt 60,000
Trade debt written off 15,000 130,000
Balance b/d – specific debt 15,000
Balance b/d – general debt 20,000
Bad debt recovered 11,000 46,880
Income statement 83,120
e. Unrelieved losses brought forward from 2013 is N117,900;
f. Capital allowance for the year agreed with the relevant tax authority is N172,800. Unutilized capital
allowance brought forward is N97,500;
g. The rent of accommodation is for the general Manager whose basic salary is N120,000 per annum;
and
h. Chief Olu Ajulo is married with five children all under 16 years. He still maintains his father and
mother with N120,000 per annum.

Required
Compute the tax payable by Chief Olu Ajulo, state the relevant year of assessment.

75
SOLUTION TO Q4.10
Chief Olu Ajulo
Computation of tax liability
For 2015 year of Assessment
N N
Net profit as per account 516,900
Add: Disallowable expenses:
Managing Director’s salary 400,000
Donations 10,000
Depreciation 286,800
Rent (1/3 of N300,000) 100,000
Telephone and electricity (1/3 of N179,400) 59,800
Medical expenses 29,700
Loan to customer written off 6,000
Loan to staff written off 9,000
Increase in general provision for doubtful debt (60,000- 20,000) 40,000
Rent of accommodation (150,000-120,000) 30,000 971,300
Adjusted Profit 1,488,200
Less: loss brought forward 117,900
Relieved (117,900) 117,900
Nil
1,370,300
Capital allowance:
For the year 172,800
Brought forward 97,500
270,300
Absorbed (270,300) 270,300
Nil
Chargeable Income 1,100,000
Deduct Relief:
Consolidated relief (20% of 1,100,000 + N200,000) 420,000
Taxable Income 680,000
Tax Payable
First N300,000 @ 7% = 21,000
Next N300,000 @ 11% = 33,000
Balance of 80,000 @ 15% = 12,000
Tax payable 66,000

NOTE
The rent of accommodation for staff is allowed to the extent that it does not exceed the basic salary of the
staff. The rent paid for the General Manger, whose basic salary is N120,000 was N150,000. Therefore,
N30,000 is added back.

76
CHAPTER 5

INCOME TAX ASPECTS OF SETTLEMENT, TRUSTS AND ESTATES

The basis year for determining the assessable income of a trustee, executor or a beneficiary of a settlement, or
trust for any tax year is the preceding year basis.

PERSON LIABLE TO TAX

The persons liable to pay tax due in respect of income from an estate, trust or settlement are:

i. The beneficiaries, including any annuitant on their proportionate share in the estate, trust or
settlement’s income;
ii. The trustees or executor on the reminder, if any, after deducting all amounts apportioned to the
beneficiaries;
iii. The trustee or executor where the beneficiaries are infants; and
iv. The settlor or person creating the trust where”
- That settlor or person can direct the disposition of the capital or income; and
- The trust or settlement is reversible and that settle or person or spouse of that settler has control
over that capital or income except where the control is planned to take place on the prior death of
the beneficiary or the happening of an uncertain event by which the settlement or trust is limited.

IMPORTANT DEFINITIONS

Settlement: A means by which the enjoyment of an estate or part of it is transferred to another person, either
through a disposition, trust, covenant, agreement, arrangement or transfer of assets by reference to Trust
Deed for the benefit of persons specified.

Trust: An equitable obligation binding a person called the trustee to deal with a property over which a control
is exercised (which is called trust property) for the benefit of persons (beneficiaries) of which he himself may
be one.

Testator: A person making a will

Trustee: A person who is given the administration of a trust; a person who held a property on trust for
another. He may also be a beneficiary.

Beneficiaries: These are people that may benefit from the income of an estate. They can be:

- Legatee – a person to whom a legacy is bequeathed; and


- Annuitant – a person receiving an annual payment from the estate which may be charged on the
income or capital of specific assets of the estate.

Estate: This is the aggregate of properties possessed by a person including his goods, money and other types
of possessions.

Executor: A person appointed by a person in his /her will to administer his estate after his death. When a
person dies his estate passes into the hands of his personal representatives, executors or administrators.

Administrator: A person appointed by the court to administer the estate of a person who died intestate or of
a testator where an executor has not been appointed or if appointed, does not act.
77
Administration Period: This is the period between the date of death and the date the executor is able to set
up a trust or distribute the residue of the estate.

Settlor: a settlor includes a person by which a settlement was made or entered into directly or indirectly and
includes a person who has provided funds directly or indirectly for the purpose of the settlement or has made
with any other person reciprocal arrangement for that person to make or enter into the settlement.

Life Tenant: The right of the person on the income or property held in trust for life.

Reminder Man: A person who has a right to the capital of the settlement when the life interest terminates.

Connected Persons: Includes the husband or wife, brother or sister, ancestor, linear descendant, uncle or
aunt, nephew or niece related to a person who is the trustee of settlement of any person who is connected
with the settlor.

INCOME OF SETTLEMENTS, TRUST AND ESTATES

This is the total income of a settlor or the person who created the trust or settlement. It includes all such
income derived from, received in, or brought into the country.

CHARGEABLE PERSONS

The following are the chargeable persons in respect of settlement, trust or estates:

a. Annuitant: Income derived from the estate by any person is chargeable to tax on preceding year basis
and the annuitant is entitled to personal reliefs and allowances;
b. Beneficiaries, Trustees or Executors: Income derived from the estate will be liable to tax on the
preceding year basis. The beneficiary is entitled to personal reliefs and allowances, but the trustee or
executor will not receive any relief or allowances; and
c. Settlor: The person who created the trust in circumstances where he can direct the disposition of the
income or the right therein.

ALLOWABLE EXPENSES

The following are deductible from the income of trust or estate:

a. Any expenses of the trustee or executor relating to the settlement, trust or estate;
b. Any annuity or fixed annual amount paid out of the income of the settlement, trust or estate; and
c. Agreed capital allowances.

FORMAT OF COMPUTED INCOME DETERMINATIONS

N N
Income Earned x
Unearned x x
Deduct:
Authorized expenses of Trustees x
Annuity of fixed amount x
Trustees or executors remuneration x x
Computed Income xx
Less loss relief (if any) x
xx
Less capital allowance x

78
Expected income distributable xx
Amount due to each Beneficiary

A B C
N N N
Annuity of fixed amount x x x
Share of computed income x x x
Discretionary payments x x x
xx xx xx

TAX IDENTIFICATION NUMBER (TIN)

Tax Identification Number (TIN) refers to a unique sequential issued electronically by the Federal Inland
Revenue Service as part of the registration process and assigned to a taxpayer for identification purpose.

To generate TIN to a taxpayer, the following information is required:

a. The company’s name;


b. The company’s date of incorporation;
c. The company’s RC number;
d. The company’s registered and business address; and
e. The company’s date of commencement of business
f. The certificate of incorporation
g. Copy of certified copy of Form Co2
h. Copy of certified copy of Form Co6 etc.

Tax Identification Number (TIN) is an important requirement for payment of taxes through the Federal Inland
Revenue Service web portal. It is impossible to update the withholding tax schedule without the use of TIN.

E-TAX PAYMENT

Electronic -Taxpay: This is an online self-service tax payment system which gives taxpayers the opportunity to
pay their taxes through their banks’ online payment portals. This system is initiated by the FIRS in
collaboration with Nigerian Interbank Settlement System (NIBSS).

The main purpose of e-tax payment is to facilitate payments of taxes from the comfort of taxpayers’ offices or
homes. Taxpayers can pay using the electronic channels provided by their banks such as the banks’ internet
banking platform, branches and mobile banking platforms.

Conditions to be met by taxpayer before using e-Taxpay platform

a. Have your Taxpayer Identification Number (TIN).


b. Open an account with any bank of your choice and subscribe to the internet banking function of your
bank.

c. Ensure there is adequate fund in the account to cover the tax liability/transaction.

79
Steps to take to make payment through e-Taxpay platform

If you have a TIN, an active internet banking account and sufficient funds, then proceed with your
e-taxpayment as follows:

a. Decide the payment channel to use;


b. Thereafter decide on internet banking channel, log on to your bank’s internet banking platform e.g.
FirstOnline, GTBank Online Banking, etc;
c. In the case of GTBank Online Banking, select the “Payment” option in the menu;
d. Then select “NIBSS E-Bills payments” under the “Payment” option;
e. Select the account to debit from, to continue;
f. Inside the NIBSS E-Bills payments, select “New Request” to start a new payment. This takes you to the
NIBSS platform;
g. Select “FIRS e-Taxpay” from the displayed list services that the NIBSS platform provides, in order to start
the tax payment in particular;
h. Then enter your TIN (FIRS/JTB-TIN) or the TIN of the taxpayer you want to pay for;
i. Click “verify” to validate that the TIN belongs to the taxpayer making the payment;
j. A pop-up will appear with the TIN details. If ok, then go to the next stage;
k. Choose the tax type (e.g. Company Income Tax, Pre-Operation Levy, Value Added Tax, etc.);
l. Enter the amount tax to be debited (tax payable);
m. Accept service charge for the bank transaction (if applicable);
n. If you confirm that all the information provided are correct and valid;
o. Submit the request.

After you have a successfully carried out the transaction, the system will generate an ‘e-acknowledgement’
which you can print online, or send to a specified e-mail address. The ‘e-acknowledgement’ is a confirmation
of the transaction of payment of tax to FIRS which you present to FIRS field office for the issuance of statutory
FIRS receipt to the taxpayer. A taxpayer should ensure the ‘e-acknowledgement’ is submitted to the tax office
of domicile to get a government tax receipt for the payment made.

Real time notifications


This platform also notifies the taxpayer and FIRS through SMS alert and real time e-mail. FIRS can view
payment transactions and reports online, in real time.

Tax types payable using the e-Taxpay channel:

a. Company Income Tax


b. Education Tax
c. Petroleum Profit Tax
d. Value Added Tax
e. Personal Income Tax (PAYE for residents of FCT and non-Residents)
f. Withholding Tax. This requires a schedule to be uploaded on the platform;
g. Capital Gains Tax
h. Pre-Operational Levy
i. National Information Technology Development Fund Levy
j. Stamp Duties and late filing of penalty

80
Documentation required when making e-taxpayment:

a. Compute tax payable


b. Fill the relevant self-assessment forms
c. Prepare the relevant schedules
d. Make the payment (CIT/PAYE/WHT/VAT).

Benefits of using e-Taxpay

a. It promotes transparency in tax payment system;


b. It boosts taxpayer confidence and trust in the tax system;
c. It promotes voluntary compliance by taxpayers;
d. Convenience, time and cost saving for the taxpayers as these can be done by them within the confine of
their offices without going to the banking hall; and
e. The platform is safe and secure.

Security of the e-Taxpay Platform

The e-Taxpay service is safe and secure. The e-Taxpay platform uses the security measures provided by the
service channels of the banks in addition to that of NIBSS and FIRS.

81
PRACTICE QUESTIONS

5.1 Chief Omolere created a Trust for his four children – Bolu, Bimpe, Bernice and Bikomo. The records of
the Trustee for the year ended 31st December, 2015 revealed the following information:

N
Profit from trading activities 1,850,000
Interest received on fixed deposit 340,000
Rent from property (gross) 780,000
Other Income 180,000

Other information provided are:


i. Bikomo is to get a fixed annuity of N45,000 per annum;
ii. The remuneration of the Trustee has been agreed at N60,000 per annum, plus 2.0% of computed
income;
iii. The Trustee’s allowable expenses is N40,000.
iv. During the year, the Trustee made the following discretionary payments: Bolu – N50,000, Bimpe –
N45,000, Bernice – N30,000 and Bikomo – N20,000;
v. Capital allowance agreed for the business of the Trustee was N25,000; and
vi. Half of the net distributable income of the Settlement is to be shared equally among the
beneficiaries.

Required:
a. Calculate the income of settlement chargeable to tax in the hands of each of the beneficiaries.
b. Calculate the amount of the undistributable income in the hands of the Trustee.

SOLUTION TO Q5.1
a. Bolu, Bimpe, Bernice and Bikomo
Computation of Income chargeable to tax in the hands
Of each of the beneficiaries

Total Bolu Bimpe Bernice Bikomo


N N N N N
Share of distribution
Income 1,387,700 346,925 346,925 346,925 346,925
Add
Fixed annuity 45,000 - - 45,000 -
Discretionary payment 145,000 50,000 45,000 30,000 20,000
1,577,700 396,925 391,925 421,925 366,925

82
b.
Bolu, Bimpe, Bernice and Bikomo
Computation of Undistributable income assessable
To tax in the hands of the Trustee

N N
Profit from trading activities 1,850,000
Deduct: Agreed capital allowance 25,000 1,825,000
Interest received from fixed deposit 340,000
Rent from property (gross) 780,000
Other income 180,000
3,125,000
Deduct: Allowable expenses:
Bikomo’s fixed annuity 45,000
Trustee’s fixed remuneration 60,000
Trustee’s remuneration based on computed
Income = 2/100 x 3,125,000 – (45,000 + 60,000 + 40,000) 59,600
Allowable expenses of the Trustee 40,000 (204,600)
Computed Income 2,920,400
Less Discretionary payment 145,000
Distributable Income 2,775,400
Deduct: ½ of income distributable 1,387,700
Net distributable income assessable in the hands of the Trustee 1,387,700

Q5.2 Dr. Theo Chukwurah died peacefully in his sleep on 31st December 2014. He is survived by three children
– John, Jones and Janet. Two Trustees were appointed for the settlement created in favour of the
children to ensure that they were not badly affected by the demise of their father.
Details presented by the two Trustees for the year ended 31st December 2015 are as follows:

N’000
Rental income (gross) 360,000
Trading income 480,000
Interest on bank deposit 108,000
Sundry income 102,000

The following additional information is provided:


i. The interest income is from Success Bank Plc ;
ii. Administrative and other expenses amounted to N36,000;
iii. Interest on debt repayment by the Settlement was N30,000;
iv. Fixed annuity to beneficiary was N52,000 (Gross);
v. Under the terms of the Trust Deed, the Trustees made discretionary payments to John – N35,000;
Jones – N30,000 and Janet – N25,000;
vi. Each beneficiary is entitled to ¼ share of the net distributable income;
vii. Capital allowance for the year – N70,000;
viii. Trustees’ remuneration:
Deed: Fixed amount of N30,000 each plus 2.5% of computed income; and
ix. The children have no other income.

83
In view of agitation by the extended family recently, you have been contacted as a tax consultant to
compute the following:

a. Income tax payable by the Trustees on the Trust income.


b. The amount due to each beneficiary of the Settlement.

SOLUTION TO Q5.2
a.
THE SETTLEMENT OF DR. THEO CHUKWURAH
COMPUTATION OF INCOME TAX PAYABLE BY THE TRUSTEES
FOR 2016 YEAR OF ASSESSMENT
N’000 N’000
Trading income 480,000
Less Capital allowance 70 479,930
Rental income (gross) 360,000
Interest on bank deposit (gross) 108,000
Sundry income 102,000
Total income 1,049,930
Deduct: Authorized payments:
- Administrative and other expenses 36
- Interest on debt repayment 30
- Fixed annuity 52
- Trustees remuneration –fixed 60
- Trustees remuneration – variable 26,244 26,422
Total computed income 1,023,508
Deduct: Discretionary payments:
John 35
Jones 30
Janet 25 90
Net computed income 1,023,418
Distribution to beneficiaries
John (1/4 x 1,023,418) 255,854.5
Jones (1/4 x 1,023,418) 255,854.5
Janet (1/4 x 1,023,418) 255,854.5 767,563.5
Amount taxable in the hands of the Trustees 255,854.5
Deduct: reliefs and allowances:
Consolidated reliefs =
Higher of: N200,000 or 1% of N1,023,418,000) 10,234.2
Plus: 20% of N1,023,418,000 204,683.6 214,917.8
Taxable income: 40,936.7

Tax liability N
First N300,000 x 7% 21,000
Next N300,000 x 11% 33,000
Next N500,000 x 15% 75,000
Next N500,000 x 19% 95,000
Next N1,600,000 x 21% 336,000
Balance N37,736,700 x 24% 9,056,808
9,616,808

84
b.
THE SETTLEMENT OF DR. THEO CHUKWURAH
COMPUTATION OF AMOUNT DUE TO THE BENEFICIARIES
FOR 2015 YEAR OF ASSESSMENT

John Jones Janet


N’000 N’000 N’000
Discretionary payments 35 30 25
Share of net distributable income 255,854.5 255,854.5 255,854.5
255,889.5 255,854.5 255,879.5

WORKINGS

VARIABLE TRUSTEES’S REMUNERATION


N’000 N’000
Total income 1,049,930
Less expenses:
Admin and others: 36
Interest on debt payment 30
Fixed annuity 52
Trustees’ remuneration (fixed) 60 178
1,049,752

Variable remuneration 2.5% of 1,049,752 26,243.8


=i.e. 26,244

Q5.3 Mr. Adaku created a Trust many years ago for the benefit of his four children, Adense, Bintus, Mitchel
and Daniel. A lawyer was appointed as the Trustee of his estate.
For the year ended 30 September, 2015, the Trust income was N3,600,000. Each of the beneficiaries
receive an annuity of N180,000 per annum while administration expenses for the year was N60,000. The
trustee is entitled to a remuneration of 2.5% of the computed income.

Mr. Adaku instructed that discretionary payment of N25,000, N24,000 and N20,000 be made to Adense,
Bintus, Mitchel and Daniel respectively. In addition, 90% of the remainder of the computed income
should be shared equally among the four children.

As tax consultant, you have been asked to supervise the administration of the Trust.

Required:
a. State the basis of assessment of Estate, Trust and Settlements.
b. Compute the income of the Trust.
c. Determine the amount due to each beneficiary.

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SOLUTION TO 5.3

a. The basis of the assessment of Estate, Trust and Settlements is preceding year basis.

b.
THE TRUST OF MR. ADAKU
COMPUTATION OF INCOME OF THE TRUST
FOR 2016 YEAR OF ASSESSMENT

N N
Income from the Trust 3,600,000
Deduct: Authorized payments:
Annuity (N180,000 x 4) 720,000
Administrative expenses 60,000
Trustee’s remuneration 2.5/102.5 x (3,600,000-780,000) 68,780 848,780
Total computed income 2,751,220
Deduct: Discretionary payments:
Adense 25,000
Bintus 24,000
Mitchel 22,000
Daniel 20,000 91,000
Net computed income 2,660,220
Distribution to beneficiaries (90% x NCI) 2,394,196
Distributed to:
Adense 598,549.50
Bintus 598,549.50
Mitchel 598,549.50
Daniel 598,549.50
2,394,196.00 2,394,196
Amount taxable in the hands of the Trustee 266,022

c. Amount due to the beneficiaries:

Adense Bintus Mitchel Daniel


N N N N

Annuity 180,000 180,000 180,000 180,000


Discretionary payment 25,000 24,000 22,000 20,000
Share of distributable income 598,549.50 598,549.50 598,549.50 598,549.50
803,549.50 802,549.50 800,549.50 798,549.50

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CHAPTER 6

COMPANIES INCOME TAX

Companies’ incomes are chargeable to tax under the Companies Income Tax Act Cap C.21, LFN 2004 as
amended by Companies Income Tax (amendment) Act, 2007. Incomes of all companies operating in the
country are subject to this tax except those specifically exempted under the Act. The Act clearly distinguishes
between Nigerian and non- Nigerian companies. The Act defined Nigeria companies as one incorporated
under the Companies and Allied Matters Act. 1990, as amended. While it defined a foreign company (non –
Nigerian company) as any company or corporation established by or under any law in force in any territory or
country outside Nigeria. Such companies are not incorporated under the Companies and allied Matters Act
1990.

The total profits of Nigerian companies are assessable to Nigeria tax whether the profits have been derived
from, bought into or received in Nigerian or not. While profits of a non-Nigerian company are subject to tax
under the Act (CITA) only to the extent to which such profits are attributable to the company’s operations in
Nigeria. However, where dividends, interest or royalties are paid to a non-Nigerian company, withholding tax
of 10% is deductible.

We shall cover the following areas:

- Profits chargeable and exempted by the Act;


- Allowable and disallowable deductions;
- Basis periods;
- Loss Relief;
- Assessable Profits; and
- Special Companies;
- Minimum Tax provision; and
- Other aspects of companies’ tax:
i. Companies in joint venture;
ii. Where a company is sold or transferred;
iii. Where a company is reconstituted;
iv. Where there is a merger of companies; and
v. Specialized companies.

1. PROFIT CHARGEABLE AND EXEMPTED.


Profit has been defined “as the surplus by which the receipts from the trade exceed the expenditure
necessary for the purpose of earning those receipts….unless and until you have ascertained that there is
such a balance nothing exists to which the name profit can properly be applied.” (Russell vs Town and
country Bank 1888).

Also, in the above judicial pronouncement, to determine whether a particular activity gives rise to a
trading profit the following factors are to be considered;
a. Nature of assets;

87
b. Circumstances of purchase;
c. Vocation of tax payer;
d. Number of like transactions;
e. The object clause of Memorandum and Articles of Association;
f. Length of time property was held by the company; and
g. Circumstances of sale

1.1 CHARGEABLE PROFIT

The chargeable profits under the Act, section 8 are:


a. Any trade or business for whatever period of time such trade or business may have been carried
on;
b. Rent or any premium arising from a right granted to any other persons for the use or occupation
of any property;
c. Dividends, interest, discounts, royalties, charges or annuities;
d. Any source of annual profit or gain not falling within the preceding categories;
e. Any amount deemed to be income under a provision of the Act or;
f. Fees, dues and allowances (where ever paid) for services rendered; and
g. Any amount of profits or gain arising from acquiring or disposing short – term instruments like
Federal Government Securities, Treasury Bills, Treasury and Saving Certificates, Debentures
Certificates and Treasury Bonds.

1.2 PROFIT EXEMPTED

Profit exempted from tax as cited in section 23(1) of CITA are as follows:
a. The profits of any company being a statutory or registered friendly society in so far as such profits
are not derived from trade or business carried on by such society;
b. The profits of any company being cooperative society registered under any enactment or law
relating to cooperative societies, not being profits from any trade or business carried on by that
company other than cooperative activities solely carried out with members or from any share or
other interest possessed by that company in a trade or business in Nigeria carried on by some
other persons or authority;
c. The profits of any company engaged in ecclesiastical, charitable or educational activities of a
public character in so far as such profits are not derived from a trade or business carried on by
such company;
d. The profits of any company formed for the purpose of promoting sporting activities where the
profits are wholly expendable for such purpose subject to such conditions as the Board may
prescribe;
e. The profits of any company being a trade union registered under the Trade Union Act in so far as
such profits are not derived from a trade or business carried on by such Trade Union;
f. Dividend distributed by Unit Trust;

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g. The profits of anybody corporate established by or under any Local Government Law or Edict in
force in any state in Nigeria;
h. The profits of anybody corporate being a purchasing authority established by an enactment and
empowered to acquire any commodity for export from Nigeria from the purchase and sale
(whether for the purpose of export or otherwise) of that commodity;
i. The profits of any company or any corporation established by the law of a state for the purpose of
fostering the economic development of that state, not being profits derived from any trade or
business carried on by that corporation or from any share or other interest possessed by that
corporation in a trade or business in Nigeria carried on by some other person or authority;
j. Any profits of a company other than a Nigerian company which but for this paragraph, would be
chargeable to tax by reason of their being brought into or received in Nigeria;
k. Dividends, interest, rent or royalty derived by a company from a country outside Nigeria and
brought into Nigeria through Government approved channels;
l. The interest on deposit accounts of a foreign non- resident company provided that the deposits
into the account are transfers wholly of foreign currencies to Nigeria on or after I January 1990
through Government approved channels;
m. The interest on foreign currencies domiciliary account in Nigeria accruing in or after I January
1990;
n. Nothing in this section shall be construed to exempt from deduction from source the withholding
tax payable under sections 78-80 of the Act;
o. Dividends received from small companies in the manufacturing sector in the first five years of
their operations;
p. Dividends received from investments in wholly export – oriented businesses;
q. The profits of any Nigerian company in respect of goods exported from Nigeria provided that the
proceeds from such export are repatriated to Nigeria and are used exclusively for the purchases of
raw materials, plants equipment and spare parts;
r. The profits of a company where supplies are exclusively inputs to the manufacturing of products
for export provided that the exporter shall give a certificate of purchase of the inputs of the
exportable goods to the seller of the supplies; and
s. The profits of a company established within an export processing zone or free trade zone provided
that 100% production of such company is for export otherwise tax shall accrue proportionately on
the company. (See companies Income Tax Amendment 2007 section 5).

Also, the power to exempt lies with the President under section 23(2) (a) and (b) of CITA.

The President may by order exempt:

a. Any company or class of companies from all or any of the provisions of this Act; or
b. From taxing all or any profits of any company or class of companies from any source, on any ground
which appears to be sufficient or may amend, add to or repeal any exemption made by notice or
order.

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PROFITS OF NON-NIGERIA COMPANY

Under CITA, section 11 profits of a company other than a Nigerian company from any trade or business shall
be deemed to be derived from Nigeria:

a. If that company has a fixed base in Nigeria, to the extent that the profit is attributable to the fixed base;
b. If it does not have such a base in Nigeria but habitually operates a trade or business through a person in
Nigeria authorized to conclude contracts on its behalf or behalf of some other companies controlled by it
or which have controlling interest in it; or habitually maintains a stock of goods or merchandise in Nigeria
from which deliveries are regularly made by a person on behalf of the company, to the extent that the
profits are attributable to the business or trade on activities carried on through the person;
c. If that trade or business or activity, involves a single contract for surveys, deliveries, installation or
construction, the profit from that contract; and
d. Where the trade or business or activity is between the company and another person controlled by it or
which has controlling interest in it and conditions are made or imposed between the company and such
person in their commercial or financial relations, which in the opinion of the Revenue Service, is deemed
to be artificial o fictitious, so much of the profits adjusted by the Revenue Service to reflect arms length
transactions.

ALLOWABLE AND DISALLOWABLE DEDUCTIONS

ALLOWABLE DEDUCTIONS

These are expenses which are not specifically disallowed under any other provision of the Act and which are
wholly, exclusively, necessarily and reasonably incurred in the production of the profits and which are not
capital in nature. In addition, the following allowable deductions are listed in section 24 of the Act:

a. Interest on money borrowed and employed as Capital;


b. Rent and premiums in respect of land or building occupied for the purpose of acquiring the profit provided
the liability was incurred for that period and subject to a maximum of 100% of the basic salary of
employees in the case of residential accommodation occupied by employees of the company;
c. Expenses incurred for the repairs of premises, plant, machinery or fitness employed in acquiring the
profits, or for the renewal, repairs, or alteration of any implement, utensil or article employed;
d. Any outlay or expenses incurred during the year in respect of:
i. Salary, wages or other remuneration paid to senior staff and executives;
ii. Cost to the company of any benefit or allowance provided for the senior staff and executives which
shall not exceed the limit of the amount prescribed by the collective agreement between the company
and employees and approved by the Federal Ministry responsible for labour matters as the case may
be;
e. Bad debts written off and provision for doubtful debts of a specific nature. Any amount recovered in
respect of debts written off previously is treated as profits of the year in which such amount was
recovered and written back to the profit and loss account;
f. Contributions to a pension, provident or other retirement benefits funds, society or scheme approved by
the Joint Tax Board;

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g. In the case of the Nigerian Railway Corporation such deductions are allowed under the provisions of the
Authorized Deductions (Nigeria Railway Corporation) Rules which Rules shall continue for all purposes of
the Act; and
h. Donations made under the following conditions:
i. Must be made to a body, or institution listed on schedule 5 of the Act, as amended;
ii. Donations must be made out of the profits of the company, in essence, where a company made a loss,
the donations paid during the assessment year will not be allowed for tax purposes; and
iii. For any year of assessment, the allowable maximum amount as donation is limited to 10% of the
profits of the company before deducting the donations; and
iv. Such donation must not be of capital nature;
Donations made to a University or any tertiary institution or research institute or for any
developmental purpose or an endowment can be capital or revenue in nature. Also, such donation
can be up to 15% of the total profits or 25% of the tax payable in the year of the donation; whichever
is higher.

The Funds, Bodies and Institutions in Nigeria to which donations may be made as provided by schedule 5 of
the Act are:

a. Youth / Philanthropic:
i. The Boys Brigade of Nigeria;
ii. The Boys Scout of Nigeria;
iii. The girls Guides of Nigeria; etc
b. Religious:
i. The Christian Council of Nigeria; and
ii. Islamic Education Trust;
c. Educational
i. Any educational institution affiliated under any law with any university within Nigeria
established under any law within Nigeria and any other educational institution recognized by
the Government in Nigeria;
ii. A public fund established and maintained exclusively for providing money for the acquisition,
construction, maintenance or equipment of a building used or to be used as school or college
by the Government of the Federation or State or by public authority or by a society or
association which is carried on otherwise than for the purpose of profit or gain to the
individual members of that society or association;
iii. Educational Co-operatives Society;
iv. The national Library;
vi. Nigerian accounting Standard Board (now Financial Reporting Council);
vii. Van Leer Nigeria Education Trust Fund;
viii. Paterson Zochoris Nigeria Technical Education Trust Fund;
ix. Institute of Chartered Accountants of Nigeria (ICAN); and
x. Chartered Institute of Taxation of Nigeria, etc.

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d. Medical
i. Any hospital owned by Government of the Federation or of a State or any University Teaching
Hospital or any hospital which is carried on by a society or association otherwise than for the
purpose of profits or gains to the individual members of that society or association;
ii. The Institute of Medical Laboratory Technology; and
iii. The Nigeria Council for Medical Research
e. Relief Funds
i. The National Commission for Rehabilitation; and
ii. Any public established or approved by the Government of the Federation or established by
any of the State Governments in aid of or for the relief of drought or any other national
disaster in any part of the Federation.
f. Research
i. The National Science Technology Development Agency;
ii. The Nigeria Institute of International Affairs;
iii. The Nigeria Institute for Oil Palm Research;
iv. The Nigeria Institute for Trypanosomiasis Research;
v. National Science and Technology Funds; and
vi. The Cocoa Research Institute of Nigeria.
g. Welfare
i. The Nigeria National Advisory Council for the Blind;
ii. Associations or Societies for the Blind in Nigeria;
iii. Training Centers and Residential Schools for the Blind in Nigeria;
iv. The National Braille Library of Nigeria;
v. The Nigeria society for the Deaf and Dumb;
vi. National Sports Commission and its State Association;
vii. The Society for the Blind;
vii. Rotary International Polio Plus;
ix. The Musical Society of Nigeria, etc.
h. Foundation / Endowment Fund
i. Kewalram Chanrai Foundation Limited;
ii. Nigeria Conservation Foundation;
iii. Afprint Foundation Limited, etc and
Others
The Nigerian Museum, etc
i. Legal expenses in relation to

i. General legal advisory service;


ii. Retainnership fees;
iii. Cost of protecting or defending the company and for its properties; and
iv. Cost of renewing a short lease.
j. Any other expenses wholly, exclusively, necessarily, and reasonably incurred for the purpose of trade
or business;

92
k. Expenses proved to the satisfaction of the Board to have been incurred by the company on research
and development for the period including the amount of levy paid by it to the National Science and
Technology Funds;
l. Deduction for Research and Development: The amount to be deducted must be states as Reserve for
research and development for it to be allowed for tax purpose. Such reserve shall not exceed 10% of
the total profit of the company, for the year as ascertained for tax purpose before making such
deduction. Companies and other organizations engaged in research and development activities for
commercialization shall be allowed 20% investment tax credit on their qualifying expenditure for that
purpose.

DISALLOWABLE DEDUCTIONS

Section 27 (a) to (i) of CITA specifically listed the following expenses as not allowable for tax purposes:
a. Capital repaid or withdrawn and any expenditure of a capital nature;
b. Any sum recoverable under an insurance or contract of indemnity;
c. Taxes on income or profits levied in Nigeria or elsewhere, other than tax levied outside Nigeria on
profits which are also chargeable to tax in Nigeria where relief for the double taxation of those profits
may not be given under any other provisions of this Act;
d. Any payment to a savings, widows and orphans, pension, provident or other retirement benefits fund,
society or scheme except as permitted by paragraph (g) of section 24 of this Act;
e. The depreciation of any asset;
f. Any sum reserve out of profits, except as permitted by paragraph (f) of section 24 or 25 of this act or
as may be estimated to the satisfaction of the Board, pending the determination of the amount, to
represent the amount of any expense deductible under the provisions of that section, the liability for
which was irrevocably incurred during the period for which the income is being ascertained;
g. any expense of any description incurred within or outside Nigeria for the purpose of earning
management fee unless prior approval of any agreement giving rise to such management fee has
been obtained from the Minister;
h. Any expense whatever incurred within or outside Nigeria as management fee under any agreement
entered into after the commencement of this section except to the extent as the Minister may allow;
and
i. Any expense of any description incurred outside Nigeria for and on behalf of any company except of a
nature and to be the extent as the Board consider allowable.

BASIS PERIOD

The basis period is defined under the second schedule of CITA, paragraph 1(a) as “the period by reference to
the profits of which any assessable profits for the year fall to be computed under the provisions of section 25
(now section 29) of this Act”.

This means that the assessable profits of a tax payer are based on the adjusted profits of that business for “the
year immediately preceding the year of assessment”. This is known as “the preceding year basis”. For a tax
payer whose accounting year is from 1st January to 31st December, the assessment for 2015 assessment year
will be based on the adjusted profits of the preceding year, i.e., the basis period for the computation of
assessable profits for the company for 2015 will be the accounts of the company to 31st December of 2014.

The general rules for the determination of basis period of assessments as contained in the Act are in Section
29 (1); (2); (3) a to e; (4) a to d. However, companies are liable to tax under CITA on the basis periods for
which their individual accounts are made up. And they have a choice under the tax law as to the date which
they will make up their account provided that this accounting year end is maintained from year to year.
93
However, details of the general rules for determination of basis period of assessments are as follows:
i. If an accounting date of a company is 31st December, the normal basis period for the current year of
assessment is 1st January to 31st December of the immediate preceding year;
ii. Where the accounting year of a company does not coincide with an assessment year, it is the profit of
the accounting year ending on any day in the preceding assessment year that is taken to be the profit
of the preceding assessment year. This position will remain for as long as the company continues to
prepare its accounts over a period of 12 months ending on the same date;
iii. The first three assessment years are used to determine the basis period on commencement of a new
trade;
iv. As for cessation of a trade, the last two assessment years are used, CITA section 29(4);
v. Where there is a permanent (not temporary) change in accounting date, the year of assessment in
which the change occurs and the two years of assessment following are used to determine the basis
period. The Revenue Authority has the power to compute the assessable profits on the basis of the
old and the new accounting dates for the three relevant years then decides on the alternative that
produces a higher assessable profit; and
vi. Capital allowances are calculated by reference to the basis period of the year of assessment. That is,
the basis period is the year of expenditure which is normally the preceding year.

In the case of a trade or business:


e. Where two period overlap, the periods common to both is deemed to fall in the earlier period;
f. Where two periods coincide, they shall be treated as overlapping, and the basis period for the earlier
year of assessment shall be treated as being before the end of the basis period for the later year of
assessment;
g. Where there is an interval between the end of the basis period for one year of assessment and the
basis period for the next year of assessment then, unless the second mentioned year of assessment is
the year in which such individual permanently cease to carry on the trade or business, the interval
shall be allowed to be part of the second basis period; and
h. Where there is an interval between the end of the basis period for the year of assessment preceding
that in which the trade or business permanently cease to be carried on by such individual and the
basis period for the year in which it is so cease, the interval shall be deemed to form part of the first
basis period.

NORMAL BASIS – PRECEDING YEAR BASIS.

Where a company’s accounting year coincides with the Government fiscal year (year of assessment) it is the
accounting year ending within the preceding Government fiscal year that is taken as the preceding year.
Where a company’s accounting year does not coincide with the Government fiscal year (year of assessment),
it is the profit of the accounting year ending in the day in the preceding Government fiscal year (year of
assessment) that is taken to be the profit of the preceding year of assessment.

PRACTICE QUESTIONS

Q6.1

Ade Nigeria Limited usually makes up its accounts to 31st December of every year. The results in the
last five years are as follows:

31st December 2010 400,000
31st December 2011 620,000
st
31 December 2012 350,000
94
31st December 2013 725,000
31st December 2014 831,000
You are required to determine the relevant years of assessments and profits chargeable.

SOLUTION TO Q6.1

Year of Assessment Accounting Year end Profits Chargeable


N
2011 31st December 2010 400,000
2012 31st December 2011 620,000
2013 31st December 2012 350,000
2014 31st December 2013 725,000
2015 31st December 2014 831,000

Q6.2 Olutayo Nigeria Limited makes up its accounts to 30th June of every year. The results for the last five
years are as follows:

N
th
30 June 2011 50,000
30th June 2012 120,000
30th June 2013 75,000
30th June 2014 150,000
30th June 2015 180,000

You are require to determine the relevant years of assessments and profits chargeable

SOLUTION TO Q6.2

Year of Assessment Accounting Year Date Profits Chargeable


N
2012 30th June 2011 50,000
2013 30th June 2012 120,000
2014 30th June 2013 75,000
2015 30th June 2014 150,000
2016 30th June 2015 180,000

NEW TRADE OR BUSINESS – COMMENCEMENT RULE


When a new company commences its business, there are a set of rules by which the profits of the new
company is assessed to tax. These rules are set out in section 29(1) of CITA. And it provides that the profits
for the first three years will be derived as follows:
- First assessment year: Profit from the date of commencement to 31st of December of that year;
- Second Tax year: The profits for the first 12 months from the date of commencement of business; and
- Third Tax year: Normal preceding year basis.

However, the tax payer has the right under the section to elect that the second and third years be based on
the actual results (profits) for those years, i.e. the result for the period, 1st January to 31 st December of each
of the years. The tax payer will make this election, however, only if the total of the assessment profits on the

95
actual basis is lower than arrived at on the commencement rule basis. Also, the election must be made for the
two years combined on actual basis, not for one of the years.

Q6.3 Tees Nigeria Limited commenced business from 1st of May, 2012 and prepares its accounts on 31st
March each year. The following shows the company’s result, adjusted for tax purposes:
N
st
31 December 2012 130,000
31st March 2013 150,000
31st March 2014 160,000
st
31 March 2015 180,000

You are required to determine the assessable profits for the relevant years. Advise the company
whether to make an election for actual basis for the second and third years of assessment or not.

SOLUTION TO Q6.3

TAX YEARS BASIS PERIOD OF ASSESSMENT ASSESSABLE PROFIT


N
2012 – 1ST Year 1-5-2012 to 31-12-2012 130,000

2013 – 2ND Year 1-5-2012 to 30-4-2013


130,000 + (4/12 x150,000/1) 180,000

2014 – 3rd Year *1-5- 2012 to 30-4-2013


130,000 + (4/12 x 150,000/1) 180,000

2015 – 4th Year 1-4-2013 to 21-3-2014 160,000

*In the third year of assessment as in the case of company making up its account to any period before the
commencement period or any month before the commencement month, it is not likely to get a normal 12
month basis period ending in the preceding tax year. Therefore, the same basis period as in the second year is
used.

IF THE COMPANY MAKES AN ELECTION


The election will cover the second and third tax years. First we determine the assessable profit based on an
election – Actual profit

2013 1-1-2013 to 31-12-2013 =


(150,000 -130,000) + 9/12 x 160,000/1) N
20,000 + 120,000 = 140,000

2014 1-1-2014 to 31-12-2014


(3/12 x 160,000/1) + (9/12 x 180,000/1) 175,000
Total 315,000

The total without election = (180,000 + 180,000) = 360,000.


The company is advised to make an election.

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CESSATION OF BUSINESS

This is a situation where a business or trade is permanently discontinued or stopped. This occurs when;

a. a company goes into voluntary or involuntary liquidation;


b. A company is acquired by another company;
c. There is a merger of two companies to form a third company; and
d. A Nigerian branch of foreign company is closed down or relocated.

CESSATION RULES

The revenue authority usually adopts a set of rules in calculating the tax payable by a tax payer when its
business is permanently discontinued. The rules are:

a. The assessment for the year in which a trade or business permanently ceases will be based on the
result of operations from 1st January to the date of cessation;
b. When the notice of cessation is communicated to the revenue authority, the revenue authority would
compute the assessable profit for the penultimate year on the actual result for the period 1st January
to 31st December of that year. However, note that the assessment for the penultimate year would
have been earlier made on the preceding year basis;
c. If the assessable profit on the actual basis is greater than that computed on the preceding year basis,
the revenue authority has the option to revise the assessment;
d. This means that taxpayer has the option at the commencement of trade or business while the revenue
authority has the option on cessation of trade or business; and
e. Where a company which has permanently ceased to carry on a trade or business subsequently
receives or pays any sum which would have been included in or deducted from the profits of that
trade or business if it had been received or paid prior to the date of cessation such sum is treated as
having been received or paid on the date of cessation.

Q6.4 Adelab Nigeria Limited permanently stopped operations on 31st May 2015, having been preparing
account to 30th April each year. The adjusted profits for tax purposes for the last three years and time
of cessation were as follows:

Year ended 30th April, 2013 2,000,000


Year ended 30th April, 2014 6,000,000
Year ended 30th April, 2015 1,000,000
Up to 31st May, 2015 200,000
You are required to compute the assessable profits for the relevant years of assessment. Should the
revenue authority exercise its option?

97
SOLUTION TO 6.4

TAX YEAR BASIS PERIOD ASSESSABLE REVENUE BASIS OPTION ASSESSABLE


PROFIT PERIOD PERIOD
N N
2015 1-1-2015-31-5-2015 533,333 1-1-2015 -31-5-2015 533,333

2014 (PUB) 1-5-2012 -30-4-2013 2,000,000 1-1-2014 -31-12-2014 2,666,667

The revenue authority will exercise its option because it will result in higher tax.

CALCULATIONS
2014: Revenue Option = 4/12 x 6,000,000/1 + 8/12 x 1,000,000/1
= 2,000,000 + 666,667
= N 2,666,667

2015; Assessable Profit = 4/12 x 1,000,000/1 + 200,000


= N 533,333

CHANGE OF ACCOUNTING DATE

There are two types of change of accounting year recognized by tax authorities. These are temporary change
of accounting year and permanent change of accounting year.

TEMPORARY CHANGE OF ACCOUNTING YEAR: A temporary change of accounting year happens when the
taxpayer intends to revert to the old date for the following accounting period. Where such occurs, the
assessable profits for all years of assessment concerned will continue to be based on the result of periods of
12 months ended on the old accounting date within the relevant preceding year.

PERMANENT CHANGE OF ACCOUNTING YEAR: When change of accounting year happens permanently, the
tax law provides that the assessable profits of the taxpayer for the year of assessment in which the failure to
make up accounts to the former accounting date occurs and for two years of assessment next following shall
be computed by the revenue in its own discretion – see section 29(2) of CITA. This means that the Revenue
will pick the basis most favourable to it in terms of tax collectable. The reason for the discretion is to ensure
that government obtains the best terms possible from the change and to ensure that none of the affected
assessment is based on the profits of more than 12 months. Therefore, the three basis periods would be re-
worked from commencement along the line of the new date.

The assessment years are:


a. the year of assessment in which the failure occurs; the assessable profits of which were based on the
accounts to the old closing date; and
b. The new two following years of assessment.

The assessable profits will be computed on the basis of the old and the new accounting dates for the three
relevant years and the Revenue will decide on the alternative that produces higher assessable profits. The
preceding year rule will be strictly observed throughout the computations.

98
6.5 Tolab Nigeria Limited is a company registered in Nigeria with its parent company in the U.K. It has
operated in Nigeria for several years and prepares its accounts up to 31st December of every year like
its parent company. The parent company decided to change its accounting year end to 30 th June
effective from 2013. It has also directed Tolab Nigeria Limited to prepare its accounts every 30th June
from 2013.

The following information were provided:


Year Date Net Profits
N
2011 1-1-11 to 31-12-11 2,000,000
2012 1-1-12 to 31-12-12 5,000,000
2013 1-1-13 to 31-12-13 6,000,000
2014 1-1-14 to 31-12-14 7,000,000

Other information in respect of the accounts for the year ended 31st December are as follows
2011 2012 2013 2014
N N N N
Depreciation charged 200,000 500,000 550,000 700,000

There were no capital allowances for the years.


As a staff of the Federal Inland Revenue service, your boss has directed you to determine the
assessable profit for the relevant years.

SOLUTION TO 6.5

First, the profits presented shall be adjusted for tax purposes as follows

2011 2012 2013 2014


N N N N
Profit per Accounts 2,000,000 5,000,000 6,000,000 7,000,000
Add Back: Depreciation 200,000 500,000 550,000 700,000
Adjusted Profits 2,200,000 5,500,000 6,550,000 7,000,000

2013 is the year of change in accounting date.


The assessable profits will be computed as follows:
Alternative 1 : Old Accounting date, 31/12
N
2013 1/1/11 to 31/12/11 5,500,000
2014 1/1/12 to 31/12/12 6,550,000
2015 1/1/13 to 31/12/13 7,700,000
19,750,000

Alternative 2: New accounting Date: 30/6


N
2013 1/7/11 to 30/6/12 (6/12 x 2,200,000/1) + 6/12 x 5,500,000/1) = 3,850,000
2014 1/7/12 to 30/6/13 (6/12 x 5,500,000/1) + 6/12 x 6,550,000/1) = 6,025,000
2015 1/7/13 to 30/6/14 (6/12 x 6,550,000/1) + 6/12 x 7,700,000/1) = 6,625,000
16,500,000

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The assessable profits acceptable to the Revenue are alternative 1, as per the old accounting date which is as
follows:
N
2013 5,500,000
2014 6,550,000
2015 7,700,000
19,750,000

LOSS RELIEF
Section 31 of CITA provides that, “in arriving at total assessable profits from all sources for a year of
assessment there shall be deducted –

the amount of a loss which the Board is satisfied has been incurred by the company in any trade or
business during the preceding year of assessment:
Provided that:
i. In no circumstances shall the aggregate deduction from the assessable profits or income in any
respect of any such loss exceed the amount of such loss; and
ii. A deduction under this section for any particular year of assessment shall not exceed the amount, if
any, of the assessable profits, included in the total profits for that year of assessment, from the trade
or business in which the loss was incurred and shall be made as far as possible from the amount of
such assessable profits of the first year of assessment after that in which the loss was incurred and, so
far as it cannot be so made, then from such amount of such assessable profits of the next year of
assessment, and so on; but such deductions shall not be made against the profit of the company after
the fourth year from the year of commencement of such business.

It should be noted that losses can be carried forward for a maximum of four years following that in which
they are incurred. However, losses incurred by any company engaged in agricultural trade or business can
be carried forward without any time limit. And the loss available for relief should be computed on the
same basis as that of assessable profit, for a year of assessment.

MINIMUM TAX
This is a tax payable by a company in any year of assessment where the total assessable profits from all
sources results in a loss, or where a company’s aggregate profits results in no tax payable or tax payable which
is less than the minimum tax, according to section 33 of CITA. What this means is that such companies have to
pay tax out of their capital. This is premised on the theory that every asset should generate an income and it
is also used as an anti-avoidance measure.

Minimum tax is calculated as follows:


a. If the turnover of the company is N500,000 or below and the company has been in business for at
least four calendar years:

(i) 0.5% of Gross Profit, or


(ii) 0.5% of Net Assets, or
(iii) 0.25% of Paid – up Capital, or
(iv) 0.25% of Turnover of the company for the year, whichever is higher; and
b. If the turnover is more than N500,000, whatever is payable as calculated in (a) above plus additional
tax on the amount by which the turnover is in excess of N500,000 at a rate which shall be 50% of the
rate used in 9a) above.

100
Where minimum tax is payable, the capital allowance due in an assessment year should be deducted as far as
possible from the assessable profit of that year and the unabsorbed portion, if any shall be carried forward to
subsequent assessment years.

Section 33(3) (a) to (c) exempts the following companies from minimum tax payment:
a. a company carrying on agricultural trade or business as defined in section 9(11) of CITA;
b. a company with at least 25% imported equity capital; and
c. any company for the first four calendar years of its commencement of business.

PROCESSING INCOME TAX CLEARANCE CERTIFICATE

A Tax Clearance Certificate refers to a sheet document issued by the tax authority to a taxpayer on request
stating that company or the individual stated thereon has paid all taxes assessed up to a particular period
indicated on it or that they are not liable to tax.

In some circumstances, a tax clearance certificate must be produced before a person can be allowed to leave
the country.

Company

1. The taxpayer must file his tax returns up to date.


2. The taxpayer must apply for the TCC.
3. All taxes assessed on the taxpayer must be paid (Income Tax, Education Tax, Capital Gains Tax,
Information Technology Tax, etc) in the last three years.
4. Evidence of payment of VAT in the last three years
5. Evidence of remittances / payments of WHT up to date
Whenever the Board is of the opinion that tax assessed on profits or income of a person has been fully paid or
that tax is due on such profits or income, it shall issue a tax clearance certificate to the person within two
weeks of the demand for such certificate by that person or if not give reasons for the denial.

Any Ministry, department or agency of Government or any commercial bank either whom any person has any
dealing with respect to any of the transactions mentioned in subsection (4) of CITA 2004, shall demand from
such person a tax clearance certificate of three years immediately preceding the current year of assessment.

Content of a Tax Clearance Certificate

A tax clearance certificate shall disclose in respect of the last three years of assessment-

a. total profits or chargeable income;


b. tax payable;
c. tax paid; and
d. tax outstanding or alternatively a statement of the effect that no tax is due.

Uses of Tax Clearance Certificate

a. application for government loan for industry or business;


b. registration for motor vehicles;
c. application for firearms license;

101
d. application for foreign exchange or exchange control permission to remit funds outside Nigeria;
e. application for certificate of occupancy;
f. application for award of contracts by Government and its agencies and registered companies;
g. application for trade license;
h. application for approval of building plans;
i. application for transfer of real property;
j. application for import or export license;
k. application for plot of land;
l. application for buying agent license;
m. application for pools or gaming license;
n. application for registration as a contractor;
o. application for distribution;
p. stamping of guarantor's form for Nigerian passport;
q. application for registration of a limited liability company or of a business names; and
r. application for allocation of market stalls.
s. stamping of statement of the nominal share capital of a company to be registered and any increase in the
registered share capital of any company
t. stamping of statement of the amount of loan capital

An applicant for exchange control permission to remit funds to a non-resident recipient in respect of income
accruing from rent, dividend, interest, royalty, fees, or any other similar income shall be required to produce a
tax clearance certificate to the effect that tax has been paid on funds in respect of which the application is
sought or that no tax is payable whichever is the case.

When a person who has deducted any tax under any provisions of this Act fails to pay the tax so deducted to
the appropriate tax authority, no tax clearance certificate may be issued to that person even if he has fully
discharged his own tax liability under this Act.

Where a person is able to produce evidence that he suffered tax by deductions at source and that the
assessment year to which the tax relates falls within the period covered by the tax clearance certificate such a
person may not be denied a tax clearance certificate. Provided that any balance of tax after credit has been
given for the tax so deducted has been fully paid.

102
TAX PLANNING, TAX AVOIDANCE AND TAX EVASION

TAX PLANNING
Tax planning can be looked at from the point of view of the Tax Authority and Taxpayer. To the Tax authority,
tax planning is aimed at getting the most out of the Taxpayers and it provides a roadmap about the level of tax
to be collected and how it should be collected. It also involves putting plan in place to ensure that:
i. All taxable persons are brought into the tax net;
ii. All tax revenues due to the Government are collected as much as practicable;
iii. Incident of tax evasions are reduced to the barest minimum;
iv. Level of voluntary compliance with relevant tax laws is improved;
v. Cost of administering tax laws and cost of tax collection is within acceptable minimum;
vi. Tax offenders are punished as prescribed by the relevant laws; and
vii. Tax leakages are blocked.
Corporate tax planning is an integral part of corporate financial planning. The objective of corporate tax
planning is to minimize corporate or personal tax liability

The first step in tax planning is a thorough understanding of the various tax laws as they affect the company’s
operations or individual tax affairs. This understanding will help the company’s tax manger to discover areas
of the laws the company or the individual can explore to its advantage.

Tax planning is a proactive way of dealing with corporate and individual tax issues so as to reduce overall tax
outlays and the timing of cash outflows for payment of taxes. It involves arranging affairs to ensure that the
maximum exemptions, deductions, concessions, allowances and other tax reliefs or benefits permitted by law
are taking advantage of.

Tax planning also involves taking a proactive look at a corporate business activities, relevant legislation and
possible tax liabilities and then arranges its business affairs in such a way that it places much of its earnings
outside the ambit of the law. That is, its business is conducted in such a way that its earnings attract minimal
liability or at best, no tax at all.

The OECD Glossary of Tax Terms defines tax planning as “arrangement of person’s business and / or private
affairs in order to minimize tax liability.

In arranging corporate business affairs, consideration would be given to the timing of fixed assets purchase
and disposal, choice of accounting date and how they are likely to affect corporate tax liabilities. Also, the
impact of commencement rules in the tax legislation should be considered before deciding on an accounting
date for a new business. Planning with regards to the time profit is earned and the timing of the payment of
the applicable tax on such profit could result in significant financial advantage, in the short run, to a continuing
business. So also, time of cessation should be considered as it affects the company’s tax liabilities before the
date to formally ceases business permanently is decided upon.

The following matters should be considered in tax planning:


a. List of approved taxes and levies;
b. Important dates as they relate to tax issues:
i. Filing of Tax returns;
ii. Filing of Notice of objection;
iii. Paye monthly remittances;
iv. Paye Annual Returns;

103
v Withholding tax monthly returns and remittances;
vi VAT monthly Returns and Remittances;
vii. Monthly Pension Returns and remittances;
viii. Monthly National Housing Fund (NHF) returns and remittances;
ix. Yearly Industrial Training Fund Return and remittance.

It is important to keep to these due dates to avoid penalty and interest;


c. Timing of fixed assets acquisition and disposal;
d. Timing of capital allowances claim and amount of claim;
e. What type of lease should the company adopt – finance lease or operating lease;
f. Making a specific provision for bad debts and not a general provision;
g. Where to invest and what to invest in;
h. Adequate and proper deduction of PAYE;
i. Adequate deduction of withholding taxes;
j. Possibility of claiming Roll-over Relief on Capital Gain;
k. What to invest in – property or stock and shares – Capital gains on stock and shares are free of taxes;
l. Consider Current Tax Incentives:
i. Pioneer companies and products;
ii. Rural Investment Allowances;
iii. Export Processing Zone tax incentives;
iv. Export Free Zone tax incentives;
v. Gas Industry Incentives; and
vi. Agricultural Products tax incentives, etc;
m. Using increase in employees’ remuneration to reduce the company’s overall tax; and
n. Investment Allowances – by replacing old plant and machinery.

TAX AVOIDANCE
Tax avoidance is defined as the arrangement of a taxpayer’s financial affairs in a form that would make him
pay the least possible amount of tax. It involves using the tax shelters in the tax laws, and avoiding tax traps in
the tax laws, so as to pay less tax than he or she would otherwise pay.

Tax can be avoided in various ways, these includes:


a. Incorporating sole proprietorship or a partnership into a limited liability company;
b. Ability to claim all allowances and reliefs that are available in tax laws in other to reduce the amount
of income or profit to be charged to tax;
c. Acquisition of a loss making business;
d. Minimizing tax liability by investing in capital asset so as to have substantial capital allowances;
e. Buying articles manufactured in Nigeria to avoid paying custom duty, and
f. Avoiding the consumption of articles that attract indirect taxes.
A major tax avoidance strategy is to carry out a critical review of the tax laws, take note of the loopholes in the
law and then implement schemes to exploit the loopholes discovered in the tax laws to minimize tax liability.

Tax avoidance is permissible in law as it does not always involve the contravention of any law – it is done
within the limits of the law.

TAX EVASION
Tax evasion is a deliberate and willful practice whereby a person uses an illegal means to reduce his tax
liability or avoid paying tax entirely. The Canadian Department of National Revenue defines tax evasion as,
“the commission or omission of an act knowingly with intent to deceive so that tax reported by the taxpayer is

104
less than the tax payable under the law, or a conspiracy to commit such an offence. This may be accomplished
by deliberate omission of revenue, the fraudulent claiming of expenses or allowances, and the deliberate
misrepresentation, concealment or withholding of material fact”.

Tax may be evaded through different methods such as:


a. Refusing to register with the relevant tax authority;
b. Failure to render a return, statement and information or keep records required;
c. Making incorrect returns by omitting or understating any income liable to tax;
d. Overstating expenses so as to reduce taxable profit or income; and
e. Entering into artificial transactions.
However, the following forms of evasion methods have been identified by the Nigerian tax laws and
appropriate sanctions have been laid down against them, these include:
a. Making an incorrect returns by omitting or understating any income;
b. Failure to furnish a return, statement, or information or to keep the required records;
c. Outright Refusal or neglect to pay tax;
d. Omission to state income receipt from landed properties;
e. Omission to state income received in or brought into Nigeria from source outside Nigeria;
f. False claim of contributions to a pension scheme;
g. Reduction of quantum of tax liabilities through fraudulent tax returns;
h. Under declaration or dishonest declaration of income, earnings or assets; and
i. Giving any incorrect information in relation to any matter or thing affecting the liability to tax of any
taxable person.
Students should note that all tax evasions is illegal and constitute a criminal offence under the law. The
provision for back duty tax audit and investigation is part of the provisions in the tax laws to catch up with tax
evaders and thus bring them to book.

105
PRACTICE QUESTIONS CONTINUED

Q6.6 Teka Nigeria Limited commenced business on 1st April, 2010 and has made available the following
adjusted profit for the respective years:
N
7 months ended 31/10/2010 700,000
Year ended 31/10/2011 2,400,000
Year ended 31/10/2012 1,800,000
Year ended 31/10/2013 1,350,000
Period ended 31/12/2014 2,600,000
Year ended 31/12/2015 2,400,000

Required:
Compute the assessable profits for all the relevant years of assessment assuming that the company
takes advantage of any option available to it to minimize its tax liability.

SOLUTION TO Q6.6
Teka Nigeria limited
Computation of assessable profits
For all relevant years of assessment

Tax payer’s right of election under the commencement rule:


Assessable Profit

2010 1/4/10 – 31/12/10 N N


1/4/10 – 31/10/10 700,000
1/11/10 -31/12/10 = 3/12 x 2,400,000 400,000 1,100,000
2011 PYB (1/4/10 – 30/3/11)
1/4/10 – 30/10/10 700,000
1/11/10 – 31/3/11 = 5/12 x 2,400,000 1,000,000
(a) 1,700,000
2012 PYB (1/11/10 – 31/10/11) (b) 2,400,000
(a) + (b) 4,100,000
2011 Actual (1/1/11 -31/12/11)
1/1/11 – 31/10/11 = 10/12 x 2,400,000 2,000,000
1/11/11 -31/12/11 = 2/12 x 1,800,000 300,000
(a) 2,300,000
2012 Actual (1/1/12 -31/12/12)
1/1/12 – 31/10/12 = 10/12 x 1,800,000 1,500,000
1/11/12 -31/12/12 = 2/12 x 1,350,000 225,000
(b) 1,725,000
(a + b) 4,025,000

Teka Nigeria Limited will prefer to be assessed to tax in 2011 and 2012 years of assessment on actual basis as
this will minimize its tax liabilities for those years.

OLD DATE N
2013 1/11/11 – 31/10/12 1,800,000

106
2014 1/11/12 – 31/10/13 1,350,000
2015 1/11/13 – 31/10/14 = 12/14 x 2,600,000 2,228,571
2016 1/11/14 – 31/10/15
1/11/14 – 31/12/14 = 2/14 x 2,600,000= 371,429
1/1/15 -31/10/15 = 10/12 x 2,400,000 = 2,000,000
2,371,429
Total 5,950,000

NEW DATE N
2014 1/1/13 – 31/12/13
1/1/13 – 31/10/13 = 10/12 x 1,350,000 = 1,125,000
1/11/13 – 31/12/13 = 2/14 x 2,600,000 = 371,429 1,496,429
2015 1/1/14 – 31/12/14 = 12/14 x 2,600,000 2,228,571
2016 1/1/15 – 31/12/15 2,400,000
Total 6,125,000

The revenue authority will assess Teka Nigeria Limited to tax in 2012, 2013 and 2014 years of assessment
based on the new date because that will generate higher tax returns for those years.

SUMMARY

Year of Assessment Assessable Profits


N
2010 1,100,000
2011 2,300,000
2012 1,725,000
2013 1,800,000
2014 1,496,429
2015 2,228,571
2016 2,400,000

Q6.7 Chief Jafejo commenced business as books publisher on 1st July 2014, under the name Jafo Ventures
Limited with accounting year ending 31st December each year. Extracts from the company’s financial
records are as follows:

Period to Year ended


31/12/2014 31/12/2015
N N
Revenue 2,650,000 3,120,000
Cost of sales (800,000) (1,100,000)
Gross profit (A) 1,850,000 2,020,000
Deduct:
Newspaper 90,000 105,000
Depreciation 205,000 235,000
Salaries 105,000 155,000
Transport expenses 80,000 75,000
General Provision for bad debts 45,000 40,000
Vehicles Repairs 105,000 85,000
Formation expenses 45,000 -

107
Purchase of equipment 88,000 78,000
Donation - ANZ political party 50,000 60,000
Loss on sales of non –current assets - 65,000
Medical expenses 40,000 50,000
Total cost (B) 853,000 948,000
Net profit (A-B) 997,000 1,072,000

Capital allowances have been agreed as follows:


2015 year of Assessment N285,000
2016 year of Assessment N150,000

Required:
Compute the income and Tertiary education taxes for 2014 and 2015 year of Assessment. Ignore tax
payer’s right of election.

SOLUTION TO Q6.7

JAFO VENTURES LIMITED


COMPUTATION OF ADJUSTED PROFITS
FOR 2014 AND 2015 YEARS ASSESSMENT

6 Months ended Accounting Year ended


31st December, 2014 31st December, 2015
N N
Net profit 997,000 1,072,000
Add: Disallowable expenses
Depreciation 205,000 235,000
General provision for bad debts 45,000 40,000
Formation expenses 45,000 -
Purchase of equipment 88,000 78,000
Donation to political party 50,000 60,000
Loss on sales of non – current assets - 65,000
Adjusted profit 1,430,000 1,550,000

JAFO VENTURES LIMITED


COMPUTATION OF TAX LIABILITIES FOR 2014 YEAR OF ASSESSMENT
(BASIS PERIOD 1/7/2014 – 31/12/2014)

N N
Adjusted profit 1,430,000
Deduct capital allowance 285,000
Total profit 1,145,000
Tax payable:
Companies income tax (30% of 1,145,000) 343,500
Tertiary Education tax (2% of 1,430,000) 28,600
372,100

108
JAFO VENTURES LIMITED
COMPUTATION OF TAX LIABILITIES FOR 2015 YEAR OF ASSESSMENT
(BASIS PERIOD 1/7/2014 – 30/6/2015)

N N
Adjusted profit 1/7/14 – 31/12/14 1,430,000
1/1/15 – 30/6/15 (½ x 1,550,000) 775,000 2,205,000
Deduct capital allowance 150,000
2,055,000
Tax payable:
Companies income tax (30% of 2,055,000) 616,500
Tertiary education tax (2% of 2,205,000) 44,100
660,600

Q6.8 Tolad Nigeria Limited has been carrying on business in Nigeria for many years. The company’s
accounting year end in 31st December of each year. Due to the harsh economic condition in the
country the company has decided to wind up its operations.

The company has unutilized capital Allowances agreed with the tax authority amounting to N580,000.
The company applied for a claim for unutilized Capital Allowances to be carried back. The tax
authority has granted this request.

The company’s adjusted Profit for the relevant years are stated below:

Year ended N
31st December 2013 720,000
31st December 2014 480,000
31st May 2015 360,000

The company recovered a bad debt previously written off amounting to N48,000 on 30th April 2015.

Required:
a. Compute the Assessable Profit of the company for the relevant years.
b. Calculate the agreed Capital Allowances to be rolled back to the relevant years.
c. Compute the company’s tax liabilities for the relevant years.

SOLUTION TO Q6.8

a.
TOLAD NIGERIA LIMITED
COMPUTATION OF ASSESSABLE PROFIT FOR THE RELEVANT YEARS
TAX YEAR WORKINGS N N
2015 Adjusted profit (1/1/15 -31/5/15)
Adjusted profit 360,000
Add bad debts recovered 48,000 408,000
2014 1/1/14 – 31/12/14 (A.Y.B) 480,000
OR

109
1/1/13 – 31/12/13 (P.Y.B) 720,000 720,000
NOTE: The tax authority will choose the higher for the Penultimate year, which is N720,000.
b.

CAPITAL ALLOWANCES TO BE ROLLED BACK.

TAX YEAR N N
2015 Adjusted Profit 408,000
Deduct: Capital allowance 580,000
Restricted to 662/3 of Adjusted profit 272,000 272,000
Unabsorbed capital allowance c/d 308,000
Total Profit 136,000

2014 (Penultimate Year)


Assessable Profit 720,000
Capital allowance 308,000
Total Profit 412,000
c.
TAX LIABILITIES OF THE RELEVANT YEARS

2014 Adjusted profit as above 408,000


Chargeable profit as above 136,000
Companies income tax (N136,000 x 30%) 40,800
Tertiary education tax (N408,000 x 2%) 8,160
2015 Adjusted profit as above 720,000
Chargeable profit 412,000
Companies income tax (N412,000 x 30%) 123,600
Tertiary education tax (N720,000 x 2%) 14,400

Q6.9 Docas Limited commenced business on 1st May 2010. The company makes up its accounts to 31st
August each year.
The data below relate to the company’s trading activities.

N’000
Adjusted profit (loss) for:
Period ended 31st August 2011 (16months) (404,000)
Year ended 31st August 2012 175,000
Year ended 31st August 2013 168,000
Capital allowances for the relevant assessment years are as follows:
N’000
2010 25,000
2011 18,500
2012 15,000
2013 12,000
2014 8,000

Required:
110
Determine the basis periods and the liabilities for the relevant years. (Ignore the tax payer’s right of
election).
SOLUTION TO Q6.9
DOCAS LIMITED
DETERMINATION OF BASIS PERIOD
Tax Year Basis period Assessable profit (loss)
N’000 N’000
2010 1/5/10 – 31/12/10 8/16 x 404,000 (202,000)
2011 1/5/10 – 31/4/11 12/16 x 404,000 (303,000)
2012 1/9/10 – 31/8/11 12/16 x 404,000 (303,000)
2013 1/9/11 – 31/8/12 175,000
2014 1/9/12 – 31/8/12 168,000

COMPUTATION OF TAX LIABILITIES FOR THE RELEVANT


YEARS OF ASSESSMENT

N’000 N’000
2010 Adjusted Profit (loss) (202,000)
Loss relief ----- -
Unrelieved loss c/f (202,000)
Capital allowance 25,000
Absorbed capital allowance c/f -- .
Unabsorbed capital allowance c/f 25,000
Companies income tax liability NIL
Tertiary education tax liability NIL

2011 Adjusted Profit (loss) (303,000)


Unrelieved loss b/f (202,000)
Unrelieved loss c/f (505,000)
Loss c/f restricted to (404,000)
Capital allowance 18,500
Unabsorbed capital allowance b/f 25,000
Unabsorbed capital allowance c/f 43,500
Companies income tax liability NIL
Tertiary education tax liability NIL

2012 Adjusted profit (loss) (303,000)


Unrelieved loss b/f (404,000)
Total loss (707,000)
Loss c/f restricted to (404,000)
Capital allowance for the year 15,000
Unabsorbed capital allowance b/f 43,500
Unabsorbed capital allowance c/f 58,500
Companies income liability NIL
Tertiary education tax liability NIL

2013 Adjusted Profit 175,000


Unrelieved loss b/f (as restricted) (404,000)
Unrelieved loss c/f (229,000)

111
Capital allowance for the year 12,000
Unabsorbed capital allowance b/f 58,500
Unabsorbed capital allowance c/f 70,500
Companies income tax liability NIL
Tertiary education tax liability NIL

2014 Adjusted Profit 168,000


Unrelieved loss b/f (229,000)
Unrelieved loss c/f (61,000)
Capital allowance for the year 8,000
Unabsorbed capital allowance b/f 70,500
Unabsorbed capital; allowance c/f 78,500
Companies income tax liability NIL
Tertiary education tax liability NIL

Q6.10 Dafo Nigeria Limited was incorporated on 15th October 2008 and commenced business in January
2010. The adjusted profits for the relevant years of assessment are as follows:

N
Year ended 31/12/2010 360,000
Year ended 31/12/2011 600,000
Year ended 31/12/2012 660,000
Year ended 31/12/2013 650,000
Year ended 31/12/2014 820,000

The company received an income tax assessment of N185,000 on 1st June 2014, based on the audited
accounts for the year ended 31st December, 2013. Payments were made as follows:

N
30th June 2014 35,000
1st October 2014 60,000
30th November 2014 90,000

The company’s accountant wrote a letter to the Area Tax Controller requesting for payment of the
assessment by installment but unfortunately, he reneged on his promise.
You are given the CBN Monetary Policy Rate (MPR) plus spread at 18% per annum for the relevant
period.

Required:
Compute the interest and penalty on late payment on assessment in accordance with Section 32 (1)
(B) and (C) of Federal Inland Revenue service (Establishment) Act 2007.

112
SOLUTION TO 6.10

DAFO NIGERIA LIMITED


COMPUTATION OF INTEREST AND PENALTY
ON LATE PAYMENT OF ASSESSMENT
IN ACCORDANCE WITH SECTION 32 (1) (B) AND (C) OF FIRS ACT 2007

Total Penalty Interest


N N N N
Additional Income Tax
Assessment 185,000
Amount paid within stipulated period (35,000)
Amount subject to penalty 150,000
Penalty due @ 10% of ₦150,000 15,000 15,000
2nd payment – 1/10/14 60,000
Period of default (1/8/14 – 30/9/14) 2 months
Interest payable (N150,000 x 18% x 2/12) 4,500 4,500
Balance payment (N150,000 – 60,000) 90,000
3rd payment – 30/11/2014
Period default (1/8/14 -30/11/14) 4 months
Interest payable (N90,000 x 18% x 4/12) 5,400 ----_ 5,400
24,900 15,000 9,900

NOTE
a. Section 85 (1) (b) of Companies Income Tax Act cap c.21 LFN 2004, state that “the tax due shall carry
interest at bank lending rate from the date when the tax become payable until it is paid”

Q6.11 Rodo Nigeria Limited specializes in the importation if Green Pepper which it sells to the major eateries
in the country. The company’s financial results from its operations are as follows:
N
Year ended 30th September 2011 1,200,000
Year ended 30th September 2012 1,800,000
st
Period ended 31 December 2013 (15 months) 2,700,000
Year ended 31st December 2014 3,600,000
Year ended 31st December 2015 4,200,000

Required:
Compute the assessable profits and tax payable for the relevant years.

113
SOLUTION TO 6.11
RODO NIGERIA LIMITED
COMPUTATION OF ASSESSABLE PROFITS AND TAX PAYABLE
FOR THE RELEVANT YEARS OF ASSESSMENT
Year of change – 2013 - Based on old date
Year of Assessment Basis Period Assessment Profit
N
2013 1/10/2011 – 30/9/2012 1,800,000
2014 1/10/12 – 30/9/13 = 12/15 x 2,700,000 2,160,000
2015 1/10/13 – 30/9/14
=(3/15 x 2,700,000) + (9/12 x 3,600,000) 3,240,000
7,200,000
Based on new date
2013 1/1/12 – 31/12/12
= (9/12 x 1,800,000) + (3/15 x 2,700,000) 1,890,000
2014 1/1/13 – 31/12/13 = 12/15 x 2,700,000 2,160,000
2015 1/1/14 – 31/12/14 3,600,000
7,650,000

The Assessable Profit computed based on the new accounting date will be used by the revenue authority as it
provides a higher total assessable profits for the relevant years.

RODO NIGERIA LIMITED


TAX PAYABLE 2013 – 2015 YEARS OF ASSESSMENT
Adjusted profit Income Tax Tertiary Education Tax
N N N
2013 1,890,000 567,000 37,800
2014 2,160,000 648,000 43,200
2015 3,600,000 1,080,000 72,000
7,650,000 2,295,000 153,000

Q6.12 Pengos Nigeria Limited has been in business for many years preparing its accounts to 31st December
each year. An extract from its financial records for the year ended 31st December, 2015 is as follows:

N’000
Net profit as per account 39,500
After charging:
Donation to staff club 1,850
Office stationary 720
Provision for bad debts (General) 4,800
Loss on sale of non-current assets 2,400
Interest on loan 8,400
Franked investment income 1,200
You are given the following additional information:
a. Unrelieved losses brought forward in N3,300,000
b. Capital allowances granted for the year amounted to N35,600,000
Required:
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Compute the taxes payable for the relevant year of assessment.

SOLUTION TO 6.12

Pengos Nigeria Limited


Computation of Income Tax Liabilities
For 2016 year of Assessment

N’000 N’000
Net profit per accounts 39,500
Add: Non allowable expenses
Donation to staff club 1,850
General Provision for bad debts 1,080
Depreciation 4,800
Loss on sale of non- current assets 2,400 10,130
49,630
Less: Franked investment income 1,200
48,430
Unrelieved losses b/f (3,300)
Less capital allowance 35,600
Restricted to 662/3of N48,430 32,287 (32,287)
Unabsorbed capital allowance c/f 3,313
Total profit 12,843
Income Tax payable 12,843 x 30% 3,852.90
Tertiary Education Tax payable 48,430 x 2% 968.60
4,821.60

Q6.13 Debos Nigeria Limited has been trading for many years. The company’s year end is 31st December.
The extracts from its Statement of Comprehensive Income for the years ended 31st December 2014
and 2015 (as adjusted for tax purposes) are as follows:

Year ended 31st December 2015 2014


N N
Profit for the year 13,500,000 12,000,000
Bank interest received (gross) 2,100,000 1,500,000
Debenture interest received (gross) 900,000 900,000
Dividend received from Demis Ltd (Net) 840,000 840,000
Dividend paid to shareholders (gross) 6,600,000 5,400,000

Required:
a. Compute the company’s tax liabilities for the relevant years of assessment. Ignore capital
allowances.
b. Determine the net withholding tax payable or receivable by Debos Nigeria Limited, arising from
dividends paid and received.

115
SOLUTION TO 6.13
a.
DEBOS NIGERIA LIMITED
COMPUTATION OF INCOME TAX LIABILITIES
FOR THE RELEVANT YEARS OF ASSESSMENT

2016 2015
N N
Adjusted profit for the year 13,500,000 12,000,000
Bank interest received (gross) 2,100,000 1,500,000
Debenture interest received (gross) 900,000 900,000
Assessable profit 16,500,000 14,400,000
Income Tax (30% of assessable profit) 4,950,000 4,320,000
Tertiary Education Tax (2% of assessable profit) 330,000 288,000

b.

DEBOS NIGERIA LIMITED


COMPUTATION OF NET WITHHOLDING TAX PAYABLE/RECEIVABLE
FOR THE RELEVANT YEARS OF ASSESSMENT

2016 2015
N N
Gross Dividend received (840,000/90 x 100) 933,333 933,333
Withholding Tax on dividend paid 660,000 540,000
Withholding Tax of 10% on dividend received 93,333 93,333
Withholding tax payable to FIRS 566,667 446,667

Q6.14 Sadet Limited was incorporated on 1st June 2012 but commenced operations on 1st September 2012.
The following information is made available to you:

Period Assessable profit


N’000
Four months –period ended 31/12/2012 36,000
Year – ended 31st December 2013 54,000
Year – ended 31st December 2014 84,000

The following assets were purchased during the period:


N’000
5th June, 2012 – Land and Building 18,000
1st July, 2012 – Motor Car 7,200
15th October, 2012 – Machinery 15,000
28th February, 2013 – Furniture 4,800
1st May, 2013 – Delivery Van 6,000

Required:

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a. State the basis period of assessment and compute the total capital allowances for the first five years
of assessment.
b. Calculate the capital allowances due to be utilized for the first three years of assessment in respect of
the qualifying capital expenditure incurred by the company.
c. Compute the company’s tax liabilities for the first three years of assessment.

SOLUTION TO 6.14
a.
SADET LIMITED
DETERMINATION OF BASIS PERIOD
FOR THE RELEVANT ASSESSMENT YEARS AND CAPITAL ALLOWANCES

ASSESSMENT BASIS PERIOD FOR BASIS PERIOD FOR


YEAR ASSESSMENT CAPITAL ALLOWANCES
2012 1/9/12 – 31/12/12 1/9/12 – 31/12/12
2013 1/9/12 – 31/8/13 1/1/13 – 31/8/13
2014 1/1/13 – 31/12/13 1/9/13 – 31/12/13
2015 1/1/14 – 31/12/14 1/1/14 – 31/12/14
2016 1/1/15 – 31/12/15 1/1/15 – 31/12/15

b.

COMPUTATION OF CAPITAL ALLOWANCES


DUE FOR 3 YEARS

Land & Furniture Motor Delivery Total


Building Machinery & Fittings Car Van Allowance
Initial Allowance (c/d) 15 50 25 50 50
Annual Allowance (c/d) 10 25 20 25 25
Investment Allowance (c/d) - 10 - - -

N’000 N’000 N’000 N’000 N’000 N’000


2012 Assessment year
5/6/12 Land & Building 18,000
1/7/12 Moto Car 7,200
15/10/12 Machinery 15,000

Allowances
Initial Allowance (2,700) (7,500) - (3,600) - 13,800
Annual Allowance (w1) (410) (625) - (300) - 1,335
Written down value c/f 14,890 6,875 - 3,240 - - .
Investment allowance - 1,500 - - - 1,500

2013 Assessment Year


Additions:
28/2/13 – Furniture 4,800
1/5/13-Delivery Van 6,800
Allowances:
Initial allowance - - (1,200) - (3,400) 4,600

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Annual allowance(w2) (1,530) (1,875) (600) (900) (567) 5,472
Written down value 13,360 5,000 3,000 2,340 2,833 -

2014 Assessment Year


Annual allowance (1,530) (1,875) (720) (900) (850) 5,875
Written down value 11,830 3,125 2,280 1,440 1,983 -

2015 Assessment Year


Annual allowance (1,530) (1,875) (720) (900) (850) 5,875
Written down value 10,300 1,250 1,560 540 1,133 -

2016 Assessment Year


Annual allowance (1,530) (1,240) (720) (530) (850) 4,870
Written down value 8,770 10 840 10 283 - .

c.
SADET LIMITED
COMPUTATION OF TAX LIABILITIES
2012 – 2014 YEARS OF ASSESSMENT

N’000 N’000
2012 Year of Assessment
Basis period (1/9/12 – 31/12/12)
Assessable Profit 36,000
Capital allowance 15,135
Investment allowance 1,500 16,635
Total profit 19,365
Income Tax payable (N19,365,000 x 30%) N5,809,500
Tertiary education tax (N36,000,000 x 2%) N720,000

2013 Year of Assessment


Basis period (1/9/12 – 31/8/12)
Assessable Profit:
1/9/12 – 31/12/12 36,000
1/1/13 -31/8/13 = 54,000,000 x 8/12 36,000 72,000
Deduct: Capital allowance 10,072
Total Profit 61,928
Income tax payable (N61,928,000 x 30%) N18,578,400
Tertiary education tax (N72,000,000 x 2%) N1,440,000

2014 Year of Assessment


Basis period 1/1/13 – 31/12/13
Assessable Profit 54,000
Deduct: Capital allowance 5,875
Total Profit 48,125
Income tax payable (N48,125,000 x 30%) N14,437,500
Tertiary education tax (N54,000,000 x 2%) N1,080,000

118
Q6.15 Dentol Limited, a company manufacturing consumer products have been having liquidity problem
since 2010. The company’s shareholders injected N15million into the company in January 2011 which
boosted its liquidity and profits in 2011 and 2012.
Since the company’s management are not sure of future profitability, the Managing Direct is
recommending to the board that the company should wind up its operations. However, the Finance
Director is of the view that if the company could re-arrange its affairs the company can still be
profitable. And one of the re-arrangement the Finance Director is recommending is for the company
to change its accounting date.

You have been approached as a tax expert, to advice the board that tax liabilities will have on the two
proposals.

From the company’s Financial Statements you extracted the following data:

Profit for: N
Year ended 31st May 2009 600,000
Year ended 31st May 2010 360,000
Seven months to 31st December 2010 665,000
Year ended 31st December 2011 1,800,000
Year ended 31st December 2012 1,890,000

Required:

a. Identify the steps Dentol Limited will take if it changes its accounting date to determine its tax
liabilities.
b. Compute the assessable profits for 2011 – 2013, if the option to change accounting date is
accepted, using both the old and the new dates.
c. Compute the assessable profits for the relevant years if the cessation option is accepted using the
normal basis and the revised basis of assessment.

SOLUTION TO 6.15

a. STEPS TO BE TAKEN WHEN THERE IS A CHANGE OF ACCOUNTING DATE.


i. Determine the year of assessment in which the company failed to make up accounts to its normal year
end;
ii. Identify the two subsequent tax years;
iii. Compute the assessable profits on the preceding year basis for the three relevant tax years, using the
old accounting date;
iv. Compute the assessable profits on the preceding year basis for the three relevant tax years using the
new accounting date;
v. Aggregate the assessable profit in (iii) and (iv) above and compare the two; and
vi. It is the practice of the revenue authority to choose the higher of the assessable profits for the three
years in (v) above.

119
b.

DENTOL LIMITED
COMPUTATION OF ASSESSABLE PROFITS
FOR 2011 – 2013 ASSESSABLE YEARS.

USING OLD ACCOUNTING DATE

Y.O.A BASIS PERIOD ASSESSABLE PROFIT


N
2011 1/6/2009 -31/5/2010 360,000
2012 1/6/2010 – 31/5/2011 (665,000 + 5/12 x1,800,000) 1,415,000
2013 1/6/2011 – 31/5/2012 (1,800,000 + 7/12 + 1,890,000 x 5/12) 1,837,500
3,612,500

USING NEW ACCOUNTING DATE

Y.O.A BASIS PERIOD ASSESSABLE PROFIT


N
2011 1/1/2010 -31/12/2010 (5/12 x 360,000 + 665,000) 815,000
2012 1/1/2011 – 31/12/2011 1,800,000
2013 1/1/2012 – 31/12/2012 1,890,000
4,505,000
Comment
Based on the above calculations, Dentol Limited will be subjected to taxation on the basis of the new
accounting date by the tax authority as it provides higher assessable profit:

c.
DENTOL LIMITED
COMPUTATION OF ASSESSABLE PROFITS
FOR 2011 – 2013 ASSESSABLE YEARS.

Y.O.A BASIS PERIOD ASSESSABLE PROFIT


N N
2011 Higher
P.Y.B: 1/6/2009 -31/5/2010 360,000
A.Y.B: 1/1/2011 – 31/12/2011 1,800,000 1,800,000
2012 A.Y.B: 1/1/2012 – 31/12/2012 1,890,000

120
CHAPTER 7

TAXATION OF COMPANIES IN SPECIAL CIRCUMSTANCES

COMPANY IN PARTNERSHIP WITH ANOTHER

In a situation where two or more companies go into partnership in a business or trade, that trade or business
shall be deemed to constitute a separate source of profits, and the assessable profits of the company from
that source shall be determined under the provisions of the personal Income Tax Act 1993 in like manner as
would be the assessable income of any individual partner in that partnership.

This means that the taxation rules for determining the incomes of a partner in a partnership are the same
whether the partners therein are individuals or companies.

WHERE A COMPANY IS SOLD OR TRANSFERRED

The following provisions shall apply where a company is sold or transferred to another company for the
purpose of better organization or transfer of management and provided the Board is satisfied that one
company has control over the other or that both are controlled by some other person or are members of a
recognized group of companies:

a. The provisions of commencement and cessation shall not apply;


b. All qualifying capital expenditure are deemed to have been made at their tax written down value, that is,
no balancing adjustment may be computed;
c. The company acquiring such assets shall not be entitled to any initial allowance while annual allowance
would be based on the unexpired tax life of the qualifying capital expenditure;
d. The transferred company has no tax advantage as regard the unutilized capital allowances because any
unutilized capital allowances transferred are deemed to have been utilized prior to transfer. In the same
manner any unrelieved losses transferred are also deemed to have been relieved prior to the transfer or
sale.

What the above mean is that the often claimed advantage in the acquisition of a loss making company with
huge cash reserve is not applicable for tax purpose.

WHERE A COMPANY MERGES WITH ANOTHER COMPANY

A merger is the coming together of two or more companies to form a new company with distinct identity.
While acquisition is one company is taking over the assets and liabilities of two or more other companies and
those companies losing their identity to the acquiring company.

The tax implication of mergers and acquisitions depend on the particular type of arrangement. The major
possibilities are:

a. Where a new company takes over an existing company and the trade or business of the existing company
ceases. In this type of arrangement, cessation provisions will apply to that company that is being taken
over while the new company will be treated as a new business and commencement provisions will apply
to the new company ; and

b. Where an existing company absorbs or acquires another company and operation of the company acquired
or absorbed ceases. The cessation provision will apply to the company being acquired or absorbed.

121
However, for the company that takes over the other company, consideration will be given to the nature of
the company’s trade or business before and after the takeover. If the trade or business carried on by the
company is the same before and after the takeover, the company cannot be treated as commencing a
new trade or business, and commencement provisions will not apply. However, if the trade or business of
the absorbed company is different from that of the company that acquires it, the acquiring company will
be deemed to have commenced a new trade or business and commencement provisions will apply to the
new trade or business while the existing business of the company will be assessed on a continuing trade
basis.

The rules for mergers, acquisitions, and takeover are contained in Section 25(12) of CITA, “No merger,
takeover, transfer or restructuring of trade or business carried on by a company shall take place without
having obtained the Board’s direction under subsection 9 of this section and clearance with respect to any tax
that may be due and payable under the Capital Gains Tax Act”.

The application for the restructuring to the Board is to give the following effects:

1. that the commencement and cessation provisions of CITA would not apply to the business in
consequence of the merger;
2. the acquiring company shall not be entitled to initial allowance with respect to the transferred assets
under the said schedule and any allowance deemed to have been received by the vendor company;
3. capital gains tax should not be imposed on the gains arising from disposition of the shares or assets
transferred to the company taking over the other;
4. the assets of the companies will be transferred at their tax written down value to the successor company ;
5. the Board will be guided by the following provisions of CITA and CGTA which says that:
i. the acquisition must be based on the transfer of shares and no monetary exchange should take place,
otherwise the transaction will be liable to capital gains tax; and
ii. the company taken over must lose its identity as a limited liability company and be wound up. If the
two companies still exist side by side, capital gains tax will be imposed.
6. granting the relief, the Board may require that the transferee company gives satisfactory guarantee or
security for payment in full of all tax due or will become due by the transfer of company;
7. where a new company emerges from a merger process, the new company should render its returns in
accordance with the provision of CITA.

BASIS OF ASSESSMENT

Commencement rule will normally apply as provided under section 25(3) of CITA except where any of the
following circumstances arises:

i. where the merging companies are connected, the Board may direct that the new company should file its
returns as an on-going concern and its assessment will be determined on preceding year basis; and
ii. Where the new business is a reconstituted company.

RETURNS OF SURVIVING COMPANY.

The company that survives after the merger may retain its old name or a new name to inherit the assets,
liabilities, reserves and the entire operations of the merging companies. In this case:

i. the surviving company must file its returns in accordance with the provisions of CITA;
ii. there will be no application of the commencement rules as the surviving company will be regarded as an
existing company;
122
iii. the surviving company cannot claim initial allowance or investment allowance on the assets transferred to
it;
iv. annual allowance can be claimed only on the tax written down value of the assets transferred to it;
v. all merger expenses paid by the surviving company should be regarded as capital and therefore not
deductible for tax purpose;
vi. all fees payable in respect of the merger are liable to WHT and VAT; and
vii. Stamp duties is payable on the increase in share capital.

TAX RETURNS OF CEASED COMPANIES

Where a merger results in the cessation of a business for any of the merging companies, cessation rule will
apply to the company that has ceased business permanently except where the merging companies are
connected or a reconstituted company is formed to take over the trade previously run by the foreign parent
company.

RECONSTITUTED COMPANIES

Where a company is incorporated to carry on a trade or business previously carried on by a foreign company,
and the assets employed by the foreign company in that trade or business rest in the reconstituted company,
then the following provisions shall apply:

a. The commencement and cessation provision shall not apply to the reconstituted company;
b. The assets vested in the reconstituted company shall be deemed to have been sold to it, on the day of
incorporation of that company, for an amount equal to their written down value on the day following the
cessation of the foreign company’s trade;
c. The reconstituted company shall not be entitled to any initial allowance on those assets and shall be
deemed to have received all capital allowance granted the foreign company on those assets;
d. Unrelieved losses of the foreign company on the date of the reconstitution, shall be deemed to have been
incurred by the reconstituted company in its trade or business during the first year of assessment and shall
be deductible from its assessable profits;
e. In the computation of capital allowance, no initial allowance may be computed while the annual
allowance would be based on the un-expired tax life of the qualifying capital expenditure; and
f. The reconstituted company shall be assumed to have received all the capital allowances given to the
foreign company. Any unrelieved losses transferred are deemed to have been incurred on the first day of
the reconstitution. Such a loss will be available for relief against the taxable profit of the year of
reconstitution.

PIONEER COMPANIES

One of the investment incentives available for industries in Nigeria is contained in the Industrial Development
(Income Tax Relief) Act CAP 17, LFN 2004 (IDA), which contains legislation on pioneer companies.

A pioneer company is a company engaged in activities such as manufacturing, mining, servicing, processing
and agricultural industries whose products have been declared “pioneer products” having satisfied certain
conditions as laid down in the Act. It can also be defined as “a company certified by any pioneer certificate to
be a pioneer company”.

123
PIONEER STATUS

Pioneer status is granted to industries and in respect of products which Government has declared to be of
such status. Pioneer status grants a tax holiday to qualified or eligible industries anywhere in Nigeria and a
five – year tax holiday in respect of industries located in economically disadvantaged local government area in
Nigeria.

In granting a company pioneer status, the industry or product is regarded as one that is not already carried on
in the country or the existing industry is not producing enough to meet the expected requirements. It also
includes any industry or product for which there is a favourable prospect of development.

Tax holiday is granted under IDA by the Nigeria Investment Promotion Commission (NPC) for 3 years in the
first instance and renewable for additional 2 years.

Where an existing company on application is granted a pioneer status, the company under the provision of the
law is deemed to have ceased its old business and consequently, the cessation rule will apply to that business.

CONDITION FOR GRANTING PIONEER STATUS

It is the Federal Executive Council (FEC) that is empowered to grant a pioneer status where it is satisfied that:

a. An industry is not being carried on in Nigeria on a scale suitable to the economic requirements of
Nigeria or is not being carried on at all;
b. There are favourable prospects of further development in Nigeria of any industry; and
c. It is expedient in the public interest to encourage the development or establishment of an industry in
Nigeria by declaring the industry to be a pioneer industry and any product of the industry to be a
pioneer product.
The Federal Executive Council may direct the publication in the official gazette of a list of such industries and
products and upon publication application may at any time thereafter be made under the Act for the issuance
of pioneer certificate to any company, in relation to such pioneer industry or pioneer products. The following
are qualified to apply for a pioneer status:
a. Any company incorporated in Nigeria; and
b. Promoters of a company which is to be incorporated in Nigeria.

APPLICATION FOR A PIONEER STATUS

Application for pioneer status can be made by a company incorporated in Nigeria or by a group of persons on
behalf of a company which is to be incorporated latter. The application shall be on a prescribed form. Such
application shall state the grounds upon which the application relies. Section 4 of the Act specifically states
that no application for the issue of a certificate shall be made unless the estimated cost of qualifying capital
expenditure to be incurred by the company on or before production day (if the application is approved) is an
amount which:

I. In the case of an indigenous controlled company, is not less than N50,000; or


II. In the case of any other company is not less than N150,000.

Also, the application should state:


a. The particulars of the assets on which qualifying capital expenditure will be incurred by the company
including their source and estimated cost:
i. on or before production day; and
124
ii. during a period of 3 years following production day;
b. The place in which the assets are to be situated;
c. Estimated probable date of production day of the company or proposed company;
d. Specifically any product and by - product (not being a pioneer product) proposed to be produced by the
company or proposed company and then give a reasonable estimate of the quantities and value of such
product and by – product during a period of one year from production day;
e. The particulars of the loan and share capital or the proposed loan of the company, including the amount
and date of each issue or proposed issue, and the sources from which the capital is to be or has been
raised;
f. In the case of a company already incorporated give the name, address and nationality of each Director of
the company and the number of shares held by him; and
g. In the case of a proposed company give the name, address and nationality of foreign promoter.

The application shall also contain:

a. A declaration signed by the applicant that all the particulars contained in the application are true and an
undertaking to produce proof if required, to the satisfaction of the Minister, of the truth of any such
particular which the Minister may require the applicant to furnish; and
b. A non-refundable fee of a hundred Naira, which will be credited to the Consolidated Revenue Fund of the
Federal Government of Nigeria is expected to accompany the application.

PIONEER STATUS INCENTIVE (PSI)

A pioneer status incentive has to be applied for, and it is time bound. The application must be made within
the first year of operation. The processing of a pioneer status incentive is handled by the Nigerian Investment
Promotion Commission. The requirements for the grant of pioneer status incentive are as follows:

a. A duly completed NIPC form 2;


b. Minimum share capital of N10m;
c. Copies of Certificate of Incorporation;
d. Certified true copy of Memorandum and Article of association;
e. Copies of CAC Forms C02 and C07; and
f. Tax Clearance Certificate.

After the pioneer status incentive has been granted, a Production Day will have to be determined by the
Industrial Department of the Federal Ministry of Industries, after an inspection has been carried out by the
Department.

PRODUCTION DAY

Section 6(1) of IDA requires that not later than one month after the material date, a pioneer company shall
make application in writing to the Industrial Inspectorate Director to certify the date of its Production Day.
The company shall prepare a date to be so certified and give reasons for proposing that day.
“Material date” means:

a. In relation to a pioneer company engaged in a pioneer industry consisting of the provision of services, the
date on which the company is ready to provide such services on a commercial scale; and
b. In case of manufacturing, processing, mining, agricultural or any other pioneer industry, the date on which
the company begins to produce a pioneer product in marketable quantities.

125
The Director shall issue a Certificate to the pioneer company certifying the date of its production day, if the
Director is satisfied with the application. The production day is the commencement of the pioneer status
incentive and as such the commencement of the tax holiday period.
Dispute between the company and the Director as to the certification of the production day shall be subject to
objection and appeals as if the certificate were notice of assessment given under the provision of CITA.

PIONEER CERTIFICATE

This is a certificate issued under the Industrial Development (Income Tax Relief) Act No 22 of 1971 (IDA 1971)
now Cap 17, LFN 2004, certifying among others, a company to be a pioneer company or any such certificate as
amended under the Act.

However, no pioneer certificate shall be issued where the estimated cost of qualifying capital expenditure on
or before the production day is less than N50,000 for indigenous controlled companies or N150,000 for others.
The council will cancel any pioneer certificate found to have violated this requirement.

Where, for any reason, the council has to cancel a pioneer certificate, the date of cancellation shall be the
pioneer date, if the pioneer period is less than one year and the last anniversary of the pioneer date, where
the pioneer period is more than one year.

Where a pioneer certificate is issued, it has the following implication:


a. The pioneer Companies Relief exempts such a company from companies’ income tax for a period of three
years;
b. Such period of three years may be extended by a maximum period of two years on satisfying the Federal
Executive Council as to the volume of investment, rate of utilization of local content, expansion, efficiency
and the utilization of raw materials. The two years may start with one year and follow with another year;
c. The Relief provides a tax incentive for investment; and
d. The payment of tax free dividends to shareholders.

CANCELLATION OF PIONEER CERTIFICATE

The pioneer certificate can be revoked under the following conditions:


i. Where it is discovered that the production day is more than one year later than the estimate given in the
application for pioneer certificate; however, the council will not cancel the certificate for this reason if it is
satisfied that the delay is due to causes outside the control of the company or to other good and sufficient
cause.
ii. Where it is discovered that the qualifying capital expenditure incurred on or before production day is less
than the prescribed minimum applicable to the company;
iii. Upon application of the pioneer company; and
iv. Where the Minister is of the opinion that the pioneer company has contravened any provision of this Act.

INCOME TAX RELIEF FOR A PIONEER COMPANY

A pioneer company shall be on a tax holiday for the period stated on its certificate. This is usually a period of
three years in the first instance, commencing on the date of the production day of the company, unless
cancelled or restricted in any manner by the council.

If the certain conditions are met, the council may, at the end of the three years extend the tax relief period
for:

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a. two period of one year each; or
b. one period of two years.

A pioneer company wishing to obtain such an extension shall apply in writing within one month of the
expiration of the initial three years tax relief period or at any extension thereof. Such application shall contain
details of all capital expenditure incurred by the company by the requisite date. The requisite date is the date
of the expiry of a pioneer certificate.

TAX IMPLICATIONS AND ACCOUNTS FOR A PIONEER COMPANY

a. Profit of the pioneer company during the relief period shall not attract tax.
b. Dividend paid out of S 17 account shall not be subject to tax in the hand of the recipient.
c. No capital allowance shall be claimable on all qualifying capital expenditure incurred on or before
production day and certified accordingly; i.e. all qualifying capital expenditure shall be deemed to have
been incurred on the first day of a new trade;
d. A trade or business carried on by a pioneer company shall be deemed to have permanently ceased at the
end of its tax relief period.
e. In respect of that trade or business, the pioneer company shall be deemed to have set up and commenced
a new trade or business on the day next following the end of its tax relief period.
f. The pioneer company shall make up accounts of its old trade or business for the following period:
i. a period not exceeding one year commencing on its production day;
ii. successive periods of one year thereafter; and
iii. a period not exceeding one year ending at the date when its tax relief period ends.
g. The closing figures in respect of the pioneer company’s assets and liabilities as shown in the last accounts
in respect of its tax relief period shall be used as the opening figures for the accounts of the company’s
new trade or business which is deemed to commence immediately after the company’s tax relief period.
h. Capital expenditure incurred by the pioneer company in respect of assets acquired during the tax relief
period shall for capital allowance purposes be deemed to have been incurred on the day next following
the end of its tax relief period.
i. A net loss incurred by a pioneer company shall be deemed to have been incurred by the company on the
day on which its new trade or business commences, i.e., on the day following the expiry of the tax relief
period.
j. Losses brought forward from the pioneer relief period shall be available on the first year of the new trade
for the computation of the total profit; any part unrelieved in the first year shall lapse accordingly.

SHIPPING OR AIR TRANSPORT BUSINESS

Section 12 of CITA contains provisions regarding companies, other than Nigerian companies in shipping or air
transport business. The provision of the section is as follows:
a. The profits or losses of such company to be deemed to be derived from Nigeria is the full profits or losses
arising from carrying of passengers, mails, livestock or goods shipped, or loaded into aircraft, in Nigeria.
This does not apply to passengers, mails, livestock or goods which are brought into Nigeria solely for
transshipment or for transfer from one aircraft to another or in either direction between an aircraft and a
ship; and
b. To the sums receivable in respect of passengers, etc, carried in Nigeria as said above, there shall be
applied the following rules:
i. the ratios of profits or losses of an accounting period, before depreciation, to the total sums
receivable in respect of the business of the company; and
ii. the ratio of depreciation to the total sums so receivable as certified by the authority of any other
country (where the Non – Nigerian company is registered) to the satisfaction of the Revenue Service.
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The amount arrived at shall be the full profits or losses which shall be liable to Nigerian tax. Students should
note that this situation will apply where the Revenue Service is satisfied that the taxation authority of any
other country computes and assesses on a basis not materially different from that prescribed by the Act.

The profits of a company which operates ships or aircrafts shall be certified to the revenue board by the
taxation authority:
a. Where the ratios referred to above cannot, for any reason, be satisfactorily applied, the profits to be
deemed to be derived from Nigeria may be computed on a fair percentage on the full sum receivable
in respect of the carriage of passengers, etc, shipped or loaded in Nigeria. When this occurs, the
company has within six years to claim that its liability be computed on the basis of the ratios referred
to above; and
b. If the company fails to agree with the Revenue Service, the Revenue Service shall give notice to the
company of refusal to admit the claim and the provisions of CITA with respect to objections and
appeals shall apply accordingly with any necessary modifications.

In sub section 4 of section 12, the tax payable for any year of assessment shall not be less than 2% of the full
sums received in respect of the carriage of passengers, mails, livestock or goods shipped or loaded into an
aircraft in Nigeria.

PRACTICE QUESTIONS

7.1 Zena Airs Limited is a foreign company operating a fleet of passenger and cargo aircrafts between Nigeria
and other West African countries. The operating results for the year ended 31st December 2015, the first
year of operation are as follows:

N’000
Income from cargo freight Nigeria / Ghana 325,000
Income from passengers’ freight Nigeria / Liberia 450,000
Income from passengers’ freight Senegal / Nigeria 605,000
Income from Cargo loaded into aircraft on other routes 280,000
1,660,000
Less operating expenses:
N’000
Salaries and other expenses 850,000
Depreciation 140,000
Other expenses: General provision 35,000 1,025,000
635,000
The following additional information is provided:
a. Salaries and other expenses include:
N’000
i. Purchase of twin engines 60,000
ii. Use of airport facilities 13,000
iii. Hotel bills for first class passengers 28,000
iv. Accommodation for crew members 6,000
v. Gift to airport staff for gratification 2,000
b. Capital allowances were agreed with the revenue authority at 150% of depreciation charged in the
accounts.

You are required to compute the chargeable income of Zena Airs Limited for Nigeria tax purposes.

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SOLUTION TO Q7.1

ZENA AIRS LIMITED


COMPUTATION OF CHARGEABLE INCOME (YOA 2015)

N’000
Income from cargo freight arising from Nigeria 325,000
Income from passengers’ freight Nigeria / Liberia 450,000
775,000
Allowable deductions:
N’000
Salaries and other expenses (as given) 850,000
Less: disallowable expenses
Gift to airport staff for gratification 2,000
848,000

Proportion applicable to Nigerian operation

775,000 X 848,000 = 395,900


1,660,000 1
Depreciation (150% of 140,000) = 210,000 605,900
Chargeable Profit 169,100

BUSINESS OF TRANSMISSION OF MESSAGES

Section 13 of CITA provided that the above shall also apply to a company other than Nigerian company
carrying on the business of transmission of messages by cable or by any form of wireless apparatus. The
provisions shall apply “mutatis mutandis” to the computation of its profit, deemed to be derived from Nigeria
through the transmission of messages to places outside Nigeria were equivalent to the shipping or loading of
passengers, mails livestock or goods in Nigeria.

INSURANCE COMPANIES

The provision for insurance companies’ taxation is in section 14 of CITA and it provides that:
For non –life insurance companies, the profits on which tax may be imposed shall be ascertained as follows:
N
Gross premium plus interest and other income receivable xxx
Less: Any returned premium and premium paid on reinsurances (xx)
Less: Reserve for unexpired risks at the end of the period (xx)
Add: Reserve for unexpired risks at the beginning of the period xx
Less: actual losses settled during the period net of settlement by reinsurers (xx)
Less: Other allowable expenses (xx)
Taxable Income xxx

As regards life assurance companies, the profits on which tax may be imposed shall be the investment income,
less management expenses including commission. Any amount distributed as dividend from the actual
revaluation shall be deemed to be part of the total profits of the company. However, not more than three

129
months after an actuarial revaluation of the unexpired risks or any other revaluation has taken place, the
company shall provide to the Revenue Service full particulars of the revaluation carried out.

NON – NIGERIA INSURANCE COMPANIES

The above provision of CITA, section 14 also applies to Non – Nigerian Insurance companies. For any such
companies having a permanent establishment in Nigeria, the applicable amounts shall be those arising from
Nigerian operations. Agency expenses in Nigeria and a fair proportion of the company’s head office expenses
are also allowable deductions.

In respect of a life assurance company where profits accrue in part outside Nigeria, the assessable profits shall
be that proportion of the total investment income of the company as the premium receivable in Nigeria bear
to the total premium receivable less the agency expenses in Nigeria and a fair proportion of the head office
expenses of the company.

TAXATION OF BANKING BUSINESS

In principle, the taxable profits of banks are determined in exactly the same way and according to the same
rules as the taxable profits of any other commercial enterprise.

This can cause considerable difficulties and particularly in relation to the complex financial instruments which
form an important part of most bank’s activities. Rules, which were drawn up and adapted to cover the
commercial requirements of the early years of Nigerian banking, are not always easily applied to transactions
involving interest rate swaps, currency options or forward rate agreements.

Banks carry on a trade and are therefore chargeable to tax under the Companies Income Tax Act of 1979
(CITA) re-enacted in Volume 4 Cap 60 of the Laws of the Federation of Nigeria 1990 and lately as Cap C21 of
the Laws of the Federation 2004. The charge to tax arises under CITA 2004 section 9 which provides that tax
will be payable for each year of assessment upon the profits of any company “accruing in”, “derived from”,
“brought into”, or “received in” Nigeria in respect of “any trade or business for whatever period of time such
trade or business may have been carried on.” CITA 2004 does not set out any clear rules for measuring the
taxable annual profits and gains and the law on how they are to be determined in practice has accordingly
been developed by decisions of the courts.

Many of the leading cases did not involve the normal CITA 2004 charge but arose out of comments against
accounts not disclosing full amount of profits. Despite the length of time over which the CITA charge has
existed in substantially unaltered form, there are still many areas where the rules for determining the taxable
profits of a trade are anything but certain. New accounting principles and more complex transactions do not
always fit very happily into rules developed to deal with more straight forward trades.

Profits and Losses cannot be anticipated

In addition to specific provisions of CITA 2004 requiring adjustments to a company’s accounting profit for tax
purposes, there are certain fundamental non-statutory rules. Perhaps the most important of these is that a
profit or loss cannot be anticipated.141 This rule was the basis of the decision in Willingale v. International
Commercial Bank which determined when an accruing discount should be brought into charge.

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Recognition of earnings

One area where the dividing line between the interaction of accountancy and legal principles in determining
profit is particularly unclear is the recognition of earnings. A simple account of receipts and payments is
unlikely to be acceptable on accountancy principles or to the FIRS except to a diminishing extent in the case of
certain professions, where a cash basis of accounting may still be accepted subject to certain restrictions. That
aside, it is important to distinguish between the principle that profits and losses cannot be anticipated and the
fact that profit (and losses) may be earned before a cash payment is received. If a profit has been earned, it is’
not anticipated by being included in the accounts before cash is received.

Reporting and Compliance Requirements

As taxpaying entities, banks are, of course, subject to the usual compliance provisions contained in the
Companies Income Tax Act Cap C21 Laws of the Federation of Nigeria 2004 and elsewhere. However, the very
nature of a bank’s trade and its continued involvement with the finance puts it in an almost unique position of
holding information concerning at least one part of income or expenses of a great many other tax payers.
Accordingly, in most areas of bank’s activities in particular, the legislation imposes onerous responsibilities on
banks. First, where a bank pays interest, there is an obligation in the Companies Income Tax Act to require the
bank to give certain information to the Federal Inland Revenue Service on receipt of a notice requesting such
information.

Secondly, a bank will often be involved in paying or collecting dividend whose origin is offshore. In such
circumstances, the legislation has provided rules for the disclosure of such information on making any
payment to the recipient of the dividend.

Interest Paid by Banks

Interest on any loan granted by a bank on or after 1st January 1977, for the purposes of an agricultural trade or
business or the fabrication of any local plant or machinery or providing working capital for any cottage
industry established by the company shall be exempted from tax, provided that the moratorium is not less
than 18 months and the rate of interest on the loan is not more than the base lending rate at the time the
loan was granted. For this purpose, and in order to come within the exemption, a bank which grants this type
of loan must disclose to the Federal Inland Revenue Service information on the following:

a. the amount of the loan;


b. the moratorium period;

c. the date repayment is due to commence;

d. the amount of repayment showing capital and interest; and

e. the full particulars of the recipient of the loan and its permanent address.

The obligation to provide information is not automatic. It is triggered only if the loan granted by a bank is for
the purposes stated above as in, for example, an agricultural trade or business which means any trade or
business connected with those established under section 11(4) of CITA. These requirements are mandatory
and banks have no option but to comply.

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Reporting of and Accounting for Interest Payments

Where any interest not being interest on inter-bank deposits becomes due whether to an individual or a
company, a bank in accounting for the tax so deducted to the Federal Board of Inland Revenue shall state in
writing the particulars, as contained under section 60 (5) (a)-(c). In practice however, the Federal Board of
Inland Revenue obtains a great deal of information through these procedures concerning persons who might
otherwise not pay tax.

Call for Returns, Books, Documents and Information

Section 60 CITA 2004 as amended in 2007 , is one of the most powerful information gathering provisions
available to the Federal Inland Revenue Service, and it applies to banks generally in the same way as it applies
to any other tax payer. The Section is potentially extremely wide. The Section makes provision regarding call
for returns, books, documents and information. There is further provision for an application for extension of
time to comply with these provisions if the applicant shows good cause and the Service is satisfied. Of more
concern to Nigerian banks are the powers as enshrined in section 61 of CITA 2004 with further extension to
the section as contained in section 62 CITA that:

“A return, statement or form purporting to be furnished under this Act by or on behalf of any
person shall for all purposes be deemed to have been furnished by that person or by his authority,
as the case may be, unless the contrary is proved, and any person signing any such return,
statement or form shall be deemed to be cognisant of all matters therein.”

The general principle is that these special cases are subject to two main exceptions. First, any communication
made in furtherance of any illegal purpose is not covered nor, secondly, is any fact observed by any of the
categories of the special cases in the course of employment as such, showing that any crime or fraud had been
committed since the commencement of the employment.

In all cases the taxpayer or bank customer can waive his right in respect of providing information by any of the
categories of the special cases and therefore authorize that such information be released. The provision of
any such information is deemed to have been provided under that authority of the taxpayer or customer
unless the contrary is proved. This is the essence of section 61 CITA 2004.

In Nigeria, also, under section 156 of the Evidence Act, a banker or an officer of a bank cannot be compelled, in
any legal proceedings to which the bank is not party, to produce bankers’ book the contents of which can be
proved in cases in which secondary evidence relating to documents may be given under section 96 of the
Evidence Act, or to appear as a witness to prove the matters, transactions and accounts therein recorded,
unless by order of the court made for special cause.

Banks Acting as Agents, Trustees or Investment Manager

The general rule under section 47 CITA 2004 is that a company shall be chargeable to tax:

1. in its own name; or

2. in the name of any principal officer, attorney, factor, agent or representative of the
company in Nigeria in like manner and to like amount as such company would be
chargeable; or

132
3. in the name of a receiver or liquidator, or of any attorney, agent or representative
thereof in Nigeria, in like manner and to like amount as such company would have
been chargeable if no receiver or liquidator had been appointed.

The issue of concern here is whether or not a bank acting as agent, trustee or investment manager could be
chargeable to tax by virtue of being such agent, trustee or investment managers in accordance with section 47
CITA 2004. The main argument was that in acting as agent or trustee or investment managers, a bank was not
acting in the ordinary course of banking business, but such constituted trustee or investment business agency.
It is doubtful if this argument can still hold in the face of the various banks which now set up different entities
to carry out these duties.

Information Relating to Income from Dividends

Under section 43(1) and (3) CITA 2004 the Federal Board of Inland Revenue can require a bank which has paid
dividend to supply full particulars within fourteen days of each dividend declared and also supply a list of the
shareholders to whom the dividends is payable showing their respective shares therein. The bank is further
required to issue to each of its shareholders a certificate setting out the amount thereof to which such
shareholder is entitled and describing the profits out of which the dividends is paid, and the bank shall not be
entitled to deduct tax from any such dividend on payment thereof.

However a bank is not obliged to disclose particulars relating to income from dividends in cases where the
person beneficially entitled is not resident in Nigeria. Where, however, the non-resident person is resident in
a country with which Nigeria has concluded a double taxation arrangement which authorizes such disclosure,
section 45(3) CITA 2004 provides that banks are not protected. Where it also appears to the Federal Board of
Inland Revenue under section 21 CITA 2004 that a Nigerian Bank controlled by not more than five persons,
with a view to reducing the aggregate of the tax chargeable in Nigeria on the profits or income of the company
and those persons, has not distributed to its shareholders as dividend, profits made in any period for which
accounts have been made up by such company, which profits could have been distributed without detriment
to the company’s business as it existed at the end of such period be treated as distributed.

TAXATION OF ISLAMIC BANKING

The Central Bank of Nigeria on Tuesday 21st June 2011 issued new guidelines for the regulation and
supervision of institutions offering non-interest financial services in Nigeria. The CBN stated that the emphasis
of this guideline is on non – interest financial institutions operating under the principles of Islamic Commercial
Jurisprudence, one of the categories of non- interest financial institutions.

These guidelines, according to the CBN, are issued pursuant to the non- interest banking regime under section
33(1) (b) of the CBN Act 2007; section 23(1);52, ;55(2); 59(1) (a); and 61 of the Banks and Other Financial
Institutions Act (BOFIA) 1991(as amended) and section 4(1)(c) of the Regulation on the Scope of Banking
Activities and Ancillary Matters, No 3, 2010. It shall be read together with the provisions of other relevant
sections of BOFIA 1991(as amended), the CBN Act 2007, Companies and Allied Matters Act (CAMA) 1990 (as
amended) and Circulars/Guidelines issued by the CBN from time to time.

The guidelines further provides that Institutions Offering Islamic Financial Services (IIFS) may charge such
commissions or fees as may be necessary in accordance with the principles under this model and the funds
received as commissions and fees shall constitute the bank’s income and shall not be shared with depositors.

In addition, the guideline provides that there shall be compliance with prescribed Audit, Accounting and
Disclosure Requirement such as the Nigerian Accounting Standards Board (NASB) and that where there is a

133
conflict between the local and international standards, the provisions of the local standards issued by NASB
shall apply to the extent of the inconsistency. This is an interesting provision and one may ask, what will
happen if there is a conflict between NASB standards and those of the Islamic Financial Services Board (IFSB)
or with those of the Accounting and Auditing Organization for Islamic Financial Institution (AAOIFI)? Will
Nigerian Accounting Standards Board (NASB) and that where there is a conflict between the local and
international standards, the provisions of the local standards issued by NASB shall apply to the extent of the
inconsistency. This is an interesting provision and one may ask, what will happen if there is a conflict between
NASB standards and those of the Islamic Financial Services Board (IFSB) or with those of the Accounting and
Auditing Organization for Islamic Financial Institution (AAOIFI)? Will NASB standards prevail? Are the IFSB and
AAOIFI international standards by virtue of location or principles? If it is by location, are the Islamic principles,
it espouses not local? Do these principles extend to taxation?

Presumably, the commissions and fees which constitute the bank’s income as well as the profit sharing
investment accounts will be subject to Nigerian taxation. What taxation standards will be applicable? Would it
be those of IFSB, AAOFI, NASB or those of the Chartered Institute of Taxation? Could it even be those of the
Relevant Tax Authority who are empowered under both section 62 of CITA LFN 2004 and section 52 PITA LFN
2004 to require in writing that a taxpayer keep such records, books and accounts as maybe considered
adequate in such form and in such language (Arabic?) as maybe specified in the said notice?
How are the Islamic financial products to be taxed?

The recognition of taxation in Islam generally follows the traditions in Judeo-Christian teachings, albeit with
some differences. The equivalent of tithes in Islam is the ushr, or a tenth of gross agriculture output - a tax
calculated taking into account for instance, whether the land is irrigated naturally or by man. In Islam this tithe
is only due when there is a produce, to the extent that when the produce is destroyed by the acts of God, its
payment lapses. Thus ushr is a form of tax on income in the sense that it is value of goods (produce) that
become the basis of taxable income. The Caliph (the Head of State today) ‘has the right to levy on the people
the amount needed if funds are not available in the public treasury’. The ushr was a fixed levy, but the Jurist,
Abu Yusuf, in his treatise on taxation in Islam proposed a model of proportional taxation and not fixed levy.

A different variant of the ushr known as the ushur also exists – one introduced by the second Caliph Umar-
that resembled a type of sales tax. It was charged to traders who entered the Islamic state to conduct trade. A
third form of taxation in Islam is what is known as kharaj or land tax payable to the state- irrespective of who
owns the land. The implications of these tax impositions is that the state’s right to tax is legitimized- although
this right is not to be assumed to be unfettered. While Islam does allow the levying of taxes to a reasonable
extent to meet all necessary and desirable state expenditures, it does not permit an unjust tax structure which
penalizes honesty and creates an un- Islamic tendency of evading taxes.

The influence of religion in our corporate existence as a nation is illustrated by the existence at the beginning
of the 1999 Nigerian Constitution of a preamble which may be described as a ‘constitutional obeisance to
God’. The preamble reads:

“We the people of the Federal Republic of Nigeria, having firmly and solemnly resolve, to live in unity and
harmony as one indivisible and indissoluble sovereign nation under God.”

It appears that wording of the preamble was intended to appeal to those voters of religious conviction for the
formation of a federation.

A clear example of the influence of religion and the provision of preferential treatment are the tax concessions
available to religious organizations. For example, section 25(4) CITA 2004 LFN exempts from tax the income of
charitable, religious, scientific or public educational institutions.

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There have been different opinions regarding the taxing of religious activities in Nigeria. While some argue
that the present tax dispensation is ‘inequitable’; the non-religious groups argue that reality ought to be
reflected in denying preference to religion in tax exemptions privileges or business ventures.

EXPORT / FREE TRADE ZONE BUSINESS

A Free-Trade Zone (FTZ)

This is a specific class of special economic zone. They are a geographic area where goods may be landed,
handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities.
Only when the goods are moved to consumers within the country in which the zone is located do they become
subject to the prevailing customs duties. Free-trade zones are organized around major seaports, international
airports, and national frontiers—areas with many geographic advantages for trade. It is a region where a
group of countries has agreed to reduce or eliminate trade barriers. Free-trade zones can also be defined as
labor-intensive manufacturing centers that involve the import of raw materials or components and the export
of factory products.

FTZs are located in developing countries.

Export-Processing Zone (EPZ)

The Export Processing Zone (EPZ) is defined as an economic legation for Foreign Direct Investments
(FDI) to operate free from the Nigeria tax laws, levies, duties and foreign exchange regulations.

Examples of Export Processing Zones in Nigeria are:

a. Aluminum Smelter Company Free Trade Zone


b. Border Free Trade
c. Calabar Free Trade Zone
d. Centenary Economic City
e. Kano Free Trade Zone
f. Ibom Science & Technology Park Free Zone
g. Lekki Free Trade Zone
h. Maigatari Border Free Trade Zone
i. Nigeria International Commerce city
j. Onne Oil and Gas Free Trade Zone
k. Ogun-Guangdong Free Trade Zone
l. Illela International Border Market
m. LADOL Free Zone
n. Lagos Free Trade Zone
o. Snake Island Free Trade Zone

The first EPZ established in NIgeia was the Calabar site. This made Nigeria to add a major policy package to
make the economy more attractive to foreign investors.

135
Free Trade Zones & Nigeria Tax Regime

The Free Trade Zone Concept & Strategic Considerations are

a. Intense Competition for Global FDI


b. Measures to enhance countries as preferred FDI destinations or ‘havens’
c. Eliminate bottlenecks/drive down cost of doing business: tax incentives, liberalization of investment
/exchange control regime, quality infrastructure, education (for skilled manpower), etc.

Free Trade Zones & Nigeria Tax Regime

The objectives pursued by countries that use free zones have remained constant. The objectives include:

 development of disadvantaged regions,


 generating income and employment,
 attracting investment – especially foreign direct investment, and
 promoting technology transfer.

The Free Trade Zone’s objectives are usually pursued through free zones by providing a series of incentives to
companies and firms operating in those zones.”

Operational framework:

 minimal bureaucracy through management outsourcing to FTZ operator;


 enterprises setting up in the FTZ are giving tax breaks as an additional incentive;
 FTZs are usually set up in underdeveloped parts so as to attract employers, reduce
poverty/unemployment and stimulate the local economy.
 Multinational Corporations (MNCs) are attracted to FTZs because of supply chain cost reduction
considerations.

Applicable laws include:

NEPZA (No. 63 of 1992, now Cap. N107, LFN 2004


OGEFZA (No. 8 of 1996, now Cap. O5, LFN 2004)
CITA, Cap. 21 - Amendment Act (No.11 of 2007)
VATA, Cap. V1 - Amendment Act (No. 12 of 2007)
FIRS Establishment Act 2007 – Regulations:
Investment Procedures, Regulations and Operational Guidelines for Free Zones In Nigeria (2004)

The Nigerian Export Processing Zones Authority (NEPZA) is a Federal Government Agency under the
supervision of the Federal Ministry of Industry, Trade & Investment, and was established in 1992 following the
enactment of the Nigeria Export Processing Zones Act 63, of 1992.

The Agency is responsible for promoting and facilitating local and international investments into licensed Free
Zones in Nigeria.

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The Free Zone scheme was set up to strategically improve the investment climate by stimulating export
oriented business activities through strengthening strategic national economic policies, streamlining
administrative approval processes and providing a one-stop-shop service for businesses both within and
outside Nigeria.

NEPZA administers the incentives for all the variants of the Free Zones ranging from Export Processing Zones,
Free Trade Zones, Border Free Zones, Export Farms, Science and Technology Parks, Tourism and Resort
centers, and other more specific specialized Free Zones. A Zone can be operated by the public or private
sector or a combination of both.

137
PRACTICE QUESTIONS
Q7.1 The global income statement of Dragnet Airways Limited, a foreign airline operating into Nigeria for
the year ended 31st December, 2015 is given below:
N’000 N’000
Income from passengers, cargo and mails:
Income derived outside Nigeria 65,000,000
Income derived in Nigeria 2,500,000 67,500,000
Less: Transportation expenses:
Salaries and other expenses 48,000,000
Depreciation 5,000,000
Other expenses (Not allowed) 4,200,000 57,200,000
Net transportation profit 10,300,000
Other Income:
Income from properties (net) 600,000
Income from maintenance (net) 1,200,000
Income from duty free shops (net) 900,000
Income from catering 1,800,000 4,500,000
14,800,000
Required:
Determine the tax payable in Nigeria by Dragnet Airways Limited.

SOLUTION TO Q7.1
Dragnet Airways Limited
Determination of the Tax Payable for 2015 year of Assessment.

N’000
Nigeria income 2,500,000
Total Assessable profit (28.889% x 2,500,000) 722,225
Less Depreciation allowance (7.41% of 2,500,000) 185,250
Total Profit 536,975
Tax liability @ 30% 161,092.5
Minimum tax liability (2% x 2,500,000) N50,000,000
Income tax payable therefore is N161,092,500

WORKINGS

1. Calculation of Adjusted Profit for transportation business:


N’000
Net transportation profit per account 10,300,000
Add Back: Depreciation 5,000,000
Other disallowable expenses 4,200,000
19,500,000
2. Computation of Statutory ratios:
a. Adjusted profit: = 19,500,000 x 100
67,500,000 1 = 28.889%

b. Depreciation ratio: = 5,000,000 x 100


67,500,000 1 = 7.41%

138
Q7.2 Locket Limited is an Austrian company engaged in cable undertakings in Nigeria. The company has
been a major player in the cable business in many African countries. Presented below is the extract of
the income statement of the company for year ended 30th September 2014:

N’000 N’000
Income from cable messages
Terminating in Nigeria 480,000
Income from cable messages routed through other countries 275,000
Income from cable messages originating in Nigeria 240,000
995,000
Less:
Salaries and wages 220,000
Depreciation 180,000
Overhead expenses 120,000
Purchase of equipment 90,000 610,000
Net Profit 385,000

NOTES
i. The tax authority has obtained satisfactory evidence that the tax computed in Austria and Nigeria
are in the specialized business category;
ii. Austrian authority has certified the adjusted profit and depreciation allowance ratio;
iii. Donation to a political party amounting to N40,000,000 was included in overhead expenses.

Required:
a. Compute the company’s adjusted profit.
b. Determine the Adjusted Profit Ratio and Depreciation Ratio.
c. Compute the total profits and income tax payable in Nigeria.

SOLUTION TO Q7.2

a.
LOCKET LIMITED
Computation of Adjusted Profit for 2015 Tax Year

N’000 N’000
Net Profit per accounts 385,000
Add Back : Depreciation 180,000
Purchased of equipment 90,000
Disallowable expenses (donation) 40,000 310,000
Adjusted Profit 695,000

b. Determination of Adjusted Profit Ratio and Depreciation Ratio.


i. Adjusted profit Ratio = 695,000 x 100
995,000 1 = 69.85%

ii. Depreciation Ratio = 180,000 x 100


995,000 1 = 18.1%

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c.
COMPUTATION OF TOTAL PROFIT AND INCOME TAX
PAYABLE IN NIGERIA

N’000
Nigeria income 240,000
Assessable Profit – N240,000,000 x 69.85% 167,640
Deduct capital allowance N240,000,000 x 18.1% 43,440
Total Profit 124,200
Companies income tax payable (N124.2m x 30%) 37,260
Minimum tax = N240m x 2% 4,800

Q7.3 De – Hope line is a foreign shipping company registered in Nigeria. The figures below relate to the
company’s operation in 2015 accounting year.

N
Income derived from all route 90,000,000
Income derived in Nigeria 24,000,000
Adjusted Profit of the company 36,000,000
Depreciation 4,800,000

Required:
Calculate the tax payable by the company.

SOLUTION TO Q7.3
DE- HOPE LINE
COMPUTATION OF TAX PAYABLE FOR
2016 ASSESSMENT YEAR

Adjusted Profit Ratio = 36,000,000 x 100


90,000,000 1 = 40%

Depreciation Ratio = 4,800,000 x 100


90,000,000 1 = 5.33%

Applying the ratios to income derived in Nigeria, we have

Income derived in Nigeria N24,000,000


40% thereof (24m x 40%) 9,600,000
5.33% thereof as depreciation (5.33 x 240m) 1,279,200

Profit liable to Nigeria tax is calculated thus:


N
Adjusted Profit from Nigerian operations 9,600,000
Less capital allowance 1,279,200
Profit liable to Nigerian tax 8,320,800
Income tax (N8,320,800 x 30%) 2,496,240
Tertiary education tax (N9,600,000 x 2%) 192,000

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CHAPTER 8

EDUCATION TAX

Education Tax Act is an Act to impose an education tax on companies registered in Nigeria and to establish an
Education Fund and a Board of Trustees to manage and administer the Fund.

Section 1. Imposition of education tax

a. as from the commencement of this Act, there shall be charged and payable an annual education tax
which shall be assessed, collected and administered in accordance with the provisions of this Act.

b. The tax, which shall be at the rate of two per cent, shall be charged on the assessable profit of a
company registered in Nigeria (in this Act referred to as "a company").

c. The assessable profit of a company shall be ascertained in the manner specified in the Companies
Income Tax Act or the Petroleum Profits Tax Act (in this Act referred to as "the Act") as the case may
be.

Section 2. Assessment and collection of tax

(1) The Federal Board of Inland Revenue Service (in this Act referred to as "the Board") shall assess and
collect from a company the tax imposed by this Act and accordingly–

a. shall, when assessing a company for companies income tax or petroleum profit tax for an
accounting period of the company, also proceed to assess the company for the tax due under this
Act;

b. the provisions of the Act relating to the collection of companies' income tax or petroleum profit
tax shall, subject to this Act, apply to the tax due under this Act.

(2) The tax imposed by this Act shall be due and payable within 60 days after the Board has served notice
of the assessment on a company.

(3) The Board may, for the purpose of assessment and collecting the tax imposed by this Act, devise such
forms as it may deem necessary.

Section 3. Establishment of the Education Fund

a. There is hereby established a fund to be known as the Education Fund (in this Act referred to as "the Fund)
for the rehabilitation, restoration and consolidation of education in Nigeria and which shall be managed by
the Board of Trustees established under section 4 of this Act.

b. The Fund–

(a) shall be a body corporate with perpetual succession and a common seal; and

(b) may sue and be sued in its corporate name.

c. The Board shall pay tax collected under this Act into the Fund and shall, when doing so, submit to the
Board of Trustees, in such form as the Board of Trustees shall approve, a return showing–

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a. the name of the company making the payment;

b. the amount collected for the rehabilitation, restoration and consolidation of education in Nigeria; and

c. the assessable profit of the company for the accounting period; and

d. such other information as may be required by the Board of Trustees for the proper administration of
the tax.

Section 4. Establishment of Board of Trustees

(1) There is hereby established for the management of the Fund, an Education Trust Fund Board of Trustees
(in this Act referred to as "the Board of Trustees") which shall consist of–

i. a chairman;

ii. eight other members;

iii. a representative each of the Federal Ministries of Finance and Education who shall not be below the rank
of a Permanent Secretary; and

iv. the executive secretary who shall be the secretary to the Board of Trustees.

iv. The membership of the Board of Trustees shall reflect the six geo-political zones of the Federation.

v. The members of the Board of Trustees shall–

1. be persons with considerable experience from both the public and private sectors to represent the
business, financial and education sectors;

2. be appointed by the President on the recommendation of the Minister;

3. other than the ex-officio members, each hold office for a term of 4 years in the first instance and may
be eligible for appointment for a further term of 4 years and no more;

4. be paid such remuneration and allowances as the President may, from time to time, determine.

vi. The Board of Trustees shall meet for the conduct of its business at such times, places and on such days as
the chairman may appoint, not being less than four times in a year.

vii. The supplementary provisions contained in the Schedule to this Act shall have effect with respect to the
proceedings of the Board and other matters contained therein.

Section 6. Functions of the Board of Trustees

The Board of Trustees shall have responsibility to–

a. monitor and ensure collection of tax by the Federal Inland Revenue Service and ensure transfer to the
Fund;
b. manage and disburse the tax;
c. liaise with the appropriate Ministries or bodies responsible for collection or safekeeping of the tax;
d. receive requests and approve admittable projects after due consideration;
e. ensure disbursement to various levels and categories of education;
f. monitor and evaluate execution of the projects;
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g. invest funds in appropriate and safe securities;
h. update the Federal Government on its activities and progress through annual and audited reports;
i. review progress and suggest improvement within the provisions of this Act;
j. do such other things as are necessary or incidental to the objects of the Fund under this Act or as may be
assigned by the Federal Government.

7. Management and administration of the Fund

(1) The Board of Trustees shall administer the tax imposed by this Act and disburse the amount in the Fund to
Federal, State and local .government educational institutions, including primary and secondary schools,
for any other matter ancillary thereto, but specifically for the following–

a. works centres and prototype development;

b. staff development and conference attendance;

c. library system at the different levels of education;

d. research equipment procurement and maintenance;

e. Higher Education Book Development Fund;

f. redressing any imbalance in enrolment mix as between the higher educational institutions; and (g)

execution of the nine-year compulsory education programme.

(2) In disbursing the tax as between the various levels of education–

a. higher education section shall receive fifty per cent;

b. primary education section shall receive thirty per cent; and

c. the secondary education, section shall receive twenty per cent, of the tax collected in anyone year.

(3) The distribution of tax accruing to the higher education section shall be in the ratio of 2: I: I as between
universities, polytechnics and colleges of education.

(4) The Board of Trustees shall administer, manage and disburse the tax imposed by this Act on the basis of–

i. equality among the six geo-political zones of the Federation;

ii. equality among the States within a zone;

iii. equality among the local governments or area councils. within a State or the Federal Capital Territory,
Abuja respectively.

(5) Notwithstanding the provisions of subsections (1), (2), (3) and (4) of this section, the Board of Trustees
shall have power to give due consideration to the peculiarities of each geopolitical zone in the
disbursement and management of the tax imposed by this Act between the various levels of education.

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Section 8. Appointment of the executive secretary and other staff of the Fund

1. The shall be appointed for the Fund an Executive Secretary shall:

a. be appointed by the President on the recommendation of the Minister,


b. be a person with good knowledge in administrative matters,
c. be the Chief Executive and accounting officer,
d. have such qualifications and experience as are appropriate for a person required to perform the
functions of the office under this Act, and
e. hold office for a period of five years in the first instance and may be eligible for re-appointment for a
further term of five years only and on such terms and conditions as to emoluments, conditions of
service as may be specified in his letter of appointment,

2. The executive secretary shall, subject to the general direction of the Board of Trustees, be responsible
for–

a. the day-to-day administration of the Fund;


b. keeping the books and proper records of the proceedings of the Board;

c. the administration of the secretariat of the Board of Trustees; and

d. the general direction and control of all other employees of the Fund.

3. The Board of Trustees shall have power to–

a. employ either directly or on transfer or secondment from any civil or public service in the Federation
such number of employees as may, in the opinion of the Board of Trustees, be required to assist the
Board of Trustees and the executive secretary in the discharge of any of their functions under this Act;
and

b. pay to persons so employed such remuneration (including allowances) as the Board of Trustees may,
after consultation with appropriate bodies, determine.

Section 9. Service in the Fund to be pensionable

Section 10. Offences

1. A person who contravenes or fails to comply with provisions of this Act is guilty of an offence under this
Act.

2. Subject to the provisions of subsection (3) of this section–

i. if a tax due under section 2 of this Act is not paid within the time specified in that section, the Board
shall serve on the company a demand note for the unpaid tax plus a sum which is equal to five per
cent of the tax; and

ii. if a sum demanded under paragraph (a) of this subsection is not paid within two months of the
demand, the company is guilty of an offence under this Act.

3. The Board shall, with the approval of the Board of Trustees, remit in whole or in part a sum added to the
unpaid tax under subsection (2) (a) of this section.

144
4. Where an offence under this Act is committed by a body corporate or firm or other association of
individuals–

a. every director, manager, secretary or other similar officer of the body corporate;

b. every partner or officer of the firm;

c. every person concerned in the management of the affairs of the association; or

d. every person who was purporting to act in the capacity as aforesaid, is severally guilty of that offence
and liable to be proceeded against and punished for the offence in like manner as if he had himself
committed the offence, unless he proves that the act or omission constituting the offence took place
without his knowledge, consent or connivance.

Section 11. Penalties

(1) Except as otherwise provided in this Act, a person who is guilty of an offence under this Act shall on
conviction be liable–

a. for a first offence, to a fine of N10,000 or imprisonment for a term of three years;

b. for a second and subsequent offence, to a fine of N20,000 or imprisonment for a term of five years or
to both such fine and imprisonment.

(2) The institution of proceedings or imposition of a penalty under this Act shall not relieve a company from
liability to pay to the Board a tax which is or may become due under this Act.

Section 12. Limitation of suits against the Fund, etc.

1. Subject to the provisions of this Act, the provisions of the Public Officers Protection Act shall apply in
relation to any suit instituted against any officer or employee of the Fund.

2. Notwithstanding anything contained in any other law or enactment, no suit against any member of the
Board of Trustees, the executive secretary or any other officer or employee of the Fund for any act done
in pursuance or execution of this Act or any other law or enactment, or of any public duty or authority or
in respect of any alleged neglect or default in the execution of this Act or such law or enactment, duty or
authority, shall lie or be instituted in any court unless–

- it is commenced within three months next after the act, neglect or default complained of; or

- in the case of a continuation of damage or injury, within six months next after the ceasing thereof.

3. No suit shall be commenced against a member of the Board of Trustees, the executive secretary, officer
or employee of the Fund before the expiration of a period of one month after written notice of intention
to commence the suit shall have been served upon the Fund by the intending plaintiff or his agent.

4. The notice referred to in subsection (3) of this section shall clearly and explicitly state the cause of action,
the particulars of the claim, the name and place of abode of the intending plaintiff and the relief which he
claims.

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Meeting of the Board of the Trustees

The Board of Trustees shall meet not less than four times in each year and subject thereto, the Board of
Trustees shall meet whenever it is summoned by the Chairman; and if the Chairman is required to do so by
notice given to him by not less than three other members, he shall summon a meeting of the Board of
Trustees to be held within fourteen days from the date on which the notice is given.

1. At any meeting of the Board of Trustees, the chairman shall preside, but if he is absent, the members
present at the meeting shall appoint one of their number to preside at that meeting.

2. Where the Board of Trustees desires to obtain the advice of any person on a particular matter, the Board
of Trustees may co-opt him to the Board of Trustees for such period as it thinks fit; but a person who is in
attendance by virtue of this sub-paragraph shall not be entitled to vote at any meeting of the Board of
Trustees and shall not count towards a quorum

Committees

The Board of Trustees may appoint one or more committees to carry out, on behalf of the Board of Trustees,
such of its functions as the Board of Trustees may determine.

1. A committee appointed under this paragraph shall consist of such number of persons (not necessarily
members of the Board of Trustees) as may be determined by the Board of Trustees; and a person other
than a member of the Board of Trustees shall hold office on the committee in accordance with the terms
of his appointment.

2. A decision of a committee of the Board of Trustees shall be of no effect until it is , confirmed by the Board
of Trustees.

Uses of the Fund

The fund can be used for the followings:

1. staff development and conference attendance,


2. research equipment procurement and maintenance,
3. higher education books development fund,
4. work centre and prototype development, and
5. redressing any imbalance in enrolment mix as between higher educational institutions.

146
a.
CHAPTER 9

ADMINISTRATION AND COMPUTATION OF CAPITAL GAIN TAX

Capital gains has been defined as “Gains arising on the disposal of a chargeable asset or profit made on the
sale of a capital asset; portion of the total gain recognized on the sale or exchange of a non-inventory asset
which is not taxed as ordinary income; the difference between the selling price of stock and purchase price of
stock; the income received from the sale or transfer of capital assets” 1. However, Chambers 21st century
Dictionary, Revised Edition, at page 209 simply defined capital gain as “profit obtained from selling assets”.

Capital gains also can be defined as, “gains arising from increase in the market value of capital Assets to a
corporate Body or person who does not habitually offer them for sale, and in whose hands they do not
constitute Stock-In-Trade”2. It is the difference between the sales consideration accruing and the sum
excluded from the consideration that is the cost and ancillary costs of disposal of a capital asset.

The guiding principles to determine whether a gain is a capital gain or not are:
i. The purpose for which the asset is bought and sold: If the asset is acquired and or kept for use or as an
investment, proceeds on its disposal shall be treated as a capital receipt, and any gain thereon will be
regarded as a Capital Gain; and
ii. If the fixed assets are kept and sold regularly for profits, such disposal shall be treated as a normal
trading receipts and taxed under the Company Income Tax Act (CITA) or the Personal Income Tax Act
(PITA) as the case may be.

CAPITAL GAINS TAX ACT


The Capital Gains Tax Act was first enacted in 1967 and effective from 1967/68 assessment year. However,
the principal Act together with all amendments thereto has been re-enacted as Capital Gains Tax Act cap CI
LFN 2004. The Capital Gains Tax Act as regards corporate bodies and Non-Resident Individuals are managed
by the Federal Inland Revenue Service. While as regards individual is being managed by the States’ Internal
Revenue Services.

Therefore, appeals against any assessment to Capital Gains Tax (CGT) shall be made in accordance with
Section 65 of CITA or section 60 of the PITA as the case may be, to the Body of Appeal commissions
established under the companies Income Tax Act, Section 43(2) of CGTA.

CGT IMPOSITION
Capital Gains Tax is chargeable on the chargeable gains arising after deducting allowable expenses on the
disposal of chargeable assets in a year of assessment.

YEAR OF ASSESSMENT
In relation to Capital Gains Tax, a year of assessment means a year beginning on 1st of January and ending on
31st December in the same calendar year.

The rate of capital gain tax is ten percent

CHARGEABLE ASSETS
The Act provides that subject to any exceptions provided by this Act, all forms of property shall be assets for
the purpose of this Act, whether situated in Nigeria or not, including:
a. Options, deals and incorporeal property.

147
Incorporeal properties are assets that have values but are not tangible e.g. goodwill, copyrights and
patents. Where the assets of a debtor are acquired in exchange for debt owned and such assets are
subsequently disposed, a capital gain is deemed to have arisen.
b. Any currency other than Nigerian currency;
c. Any form of property created by the person disposing of it, or otherwise coming to be owned without
being acquired; and
d. All qualifying capital expenditure under CITA, PITA and PPTA.

CAPITAL GAINS CHARGEABLE

Section 6 of CGTA provides that subject to any exceptions provided by the Act, a disposal is deemed to have
occurred where capital sum is derived from a sale, lease, transfer, an assignment, a compulsory acquisition, or
any other disposition of assets, notwithstanding that no asset is acquired by the person paying the capital
sum, and in particular:
a. Where any capital sum is derived by way of compensation for any loss of office or employment;
b. Where any capital sum is received under a policy of insurance and the risk of any kind of damage or
injury to, or the loss of depreciation of, assets;
c. Where any capital sum is received in return for forfeiture or surrender of rights, or for refraining from
exercising rights;
d. Where any capital sum is received as consideration for use or exploitation of any asset; and
e. Without prejudice to (a) above, where any capital sum is received in connection with or arises by
virtue of any trade, business, profession or vocation.
In subsection (2) of this section 6, “capital sum” is defined as “any money or money’s worth while is not
exchanged from the consideration taken into account in the computation of capital gains under section 11 of
the Act.

Reference to disposal of assets in the Act includes a part disposal of assets, and there is a part disposal of
assets:
a. Where all proprietary rights or interests over the assets have not been disposed off; and
b. Where part of the assets is not disposed off.

COMPUTATION OF CAPITAL GAINS

In the computation of capital gains the sums allowable as a deduction from the consideration accruing to a
person on the disposal of an asset is restricted by the Act to:
a. The amount or value of the consideration, in money or money’s worth given by him or on his behalf
wholly, exclusively and necessarily for the acquisition or, if the asset was not acquired by him, any
expenditure wholly exclusively and necessarily incurred by him in providing the asset;
b. Any amount of an expenditure wholly, exclusively and necessarily incurred on the asset by him or on
his behalf for the purposes of enhancing the value of the asset being expenditure reflected in the state
or nature of the asset at the time of disposal;
c. The amount of any expenditure wholly, exclusively and necessarily incurred on the asset by him or on
his behalf in establishing, preserving or defending his title to, or a right over, the asset; and
d. The incidental costs to him of making the disposal.

148
PART DISPOSAL

Where there is a part disposal, the sums representing the amount or value of the consideration for the
acquisition of the asset (cost of acquisition of the asset) together with any amount of expenditure wholly,
exclusively and necessarily incurred on the asset for the purpose of enhancing the value of the asset as are
attributable to the asset shall, both for the purposes of the computation under the Act and in relation to the
properly which remains undisposed of, shall be apportioned. Such apportionment shall be made in reference
to:
a. The amount or value of the consideration for the disposal on the one hand (call that amount or value
A); and
b. The market value of the property which remain undisposed of on the other hand (call that market
value B).

Accordingly, the fraction of the said cost or sums allowable as a deduction in computing under the Act, the
amount of the gain accruing on the disposal shall be and the remainder shall be attributed to the property
which remain undisposed of.

ARTIFICIAL OR FICTITIOUS TRANSACTIONS

Where the Board is of the opinion that any disposition is an artificial or fictitious transaction or where any
transaction which reduces or would reduce the amount of any capital gains tax is artificial or fictitious, the
Board shall disregard such disposition and may direct that such adjustment shall be made with respect to the
liability of any person for the payment of capital gain tax as it considers appropriate so as to counteract the
reduction of liability to the capital gains tax effected or reduction which would otherwise be effected, by the
transaction and any person concerned with such transaction shall be assessable accordingly.

TRANSACTION BETWEEN CONNECTED PERSONS


In tax practice, certain persons are treated as being so closely involved with each other that they are viewed
as same person and transactions between them are treated differently from those “at arm’s length”. These
persons are referred to as “connected persons”. Transactions between such persons may be regarded as
artificial or fictitious for the purpose of determining the tax liability arising there from.

Section 23 of CGTA specifies the following persons as connected persons:


a. A person who is the husband or wife, or relative, or the husband or wife of a relative, of the individual
or the individual’s husband or wife;
b. A trustee of a settlement is connected with the settler of that settlement;
c. A partner is connected with the person with whom he is partnership;
d. A company is connected with another company if:
i. The same person controls both;
ii. One is controlled by a person who has control of the other in conjunction with persons
connected with him; or
iii. A person controls one company and persons connected with him controls the other; or
iv. The same group of persons controls both; or
v. The companies are controlled by separate group which can be regarded as the same by
interchanging connected persons.
e. A company is connected with another person who (either alone or with persons connected with him)
has control of it; and

149
f. Persons acting to secure or exercise control of a company are treated in relation to that company as
connected with each other and with any other person acting on the direction of any of them to secure
or exercise such control.

EXEMPTION FROM CAPITAL GAINS TAX

The following gains shall not be chargeable to tax:


a. Gains accruing to;
i. an ecclesiastical, charitable or educational institution of a public character;
ii. any statutory or registered friendly society;
iii. any cooperative society registered under the Cooperative Society Law of any State; and
iv. any Trade Union registered under the Trade Union Act;
In so far as the gains is not derived from any disposal of any assets acquired in connection with any
trade or business carried on by the institution or society and the gain is applied purely for the purpose
of the institution or society as the case may be (section 26);
b. Gains accruing to any Local Government Council (section 27)
c. Gains accruing to any company, being a purchasing authority established by or under any law in
Nigeria, empowered to acquire any commodity in Nigeria for export from Nigeria; or
Gains accruing to any cooperation established by or under any law for the purpose of fostering the
economic development of any part of Nigeria in so far as the gains are not derived from the disposal
of any assets acquired by the cooperation in connection with any trade or business carried on by it or
from the disposal of any share or other interest possessed by the corporation in a trade or business
carried on by some persons or authority (section 27);
d. Gains accruing on disposal of investments held as part of any superannuation fund or other statutory
retirement benefits scheme to the same extent as, income derived from the assets would be
exempted under section 20 of PITA (section 28).

Disposal of a right to, or any part of any sum payable out of any superannuation fund shall also not be
chargeable (section 28) “Superannuation Fund” means a pension, provident, or other retirement
benefits fund, society or scheme approved by the Joint Tax Revenue Service under Section 21 of PITA;
e. Gains accruing on disposal by any person of a decoration awarded for valour or gallant conduct which
he acquires otherwise than for consideration in money or money’s worth (section29);
f. Gains accruing from a disposal of Nigerian Government Securities (section 30) Nigerian Government
Securities include Nigeria treasury bonds, savings certificates and premium bonds issued under the
saving bonds and certificate Act;
g. Gains accruing on disposal of land compulsorily acquired by an authority having and exercising such
powers (section 9);
h. Gains accruing in connection with the disposal of an interest in or the right under any policy of
assurance or contract for a deferred annuity on the life of any person (section 34);
i. Section 36 exempts sums obtained by way of compensation or damages for any injury or injury
suffered by an individual to his person or in his profession or vocation. This includes wrong or injury
for libel, slander or enticements. Sums obtained by way of compensation for loss of office exceeding
N10,000 in any year of assessment is however chargeable.
j. Section 37 exempts gains accruing on disposal of a dwelling house (with maximum land area of up to
one acre or such larger area as the Revenue may determined which has been the individual’s only or
main residence throughout the period of ownership up to the time of disposal or up to the last twelve
months before the date of disposal;
k. A gain accruing on disposal of tangible and movable assets shall not be chargeable gain if the total
value of the consideration does not exceed N1,000 in a year of assessment (section 38). If the

150
proceeds of disposal exceed N1,000 in the assessment year, the amount of CGT chargeable on the
gain shall not exceed half the difference between the amount of that proceed and N1,000.
l. A motor vehicle for carriage of passengers is an exempt asset for CGT purposes unless it is of a type
not commonly used as private vehicle and is unsuitable to be so used (section 39)
m. Section 40 exempts assets acquired by way of gift and disposed of in a similar manner.
n. Gains arising from takeover, absorption or merger provided that no cash payment is made in respect
of the shares disposed / acquired (section 32)
o. Gains in respect of disposals of securities in a Unit Trust provided the proceeds are re-invested
(section 33)
p. Stocks and shares of every description are exempted (section 30).

ROLL – OVER RELIEF (SECTION 31)


If the consideration received on disposal of an old asset used only for the purposes of a trade is applied in
acquiring a new asset in replacement to be used for the purposes of the trade and the old asset and the new
asset are within one, and the same one, of the classes of assets listed in the Act, the person carrying on the
trade shall, on making a claim as respects the consideration which has been so applied, be treated for CGT
purposes as if the :
a. Consideration for the disposal of the old asset were (if otherwise of a greater amount or value of such
amount as would secure that on the disposal neither a loss nor a gain accrues to him, and
b. Value of the consideration for the acquisition of the new asset were reduced by the excess of the
value of the actual consideration for the disposal of the old asset over the amount of the
consideration which he treated as receiving under (a) above.

PRACTICE QUESTIONS

Q9.1 Tees Limited sold a factory plant which was acquired ten years ago for N5m. The cost of acquisition at
that time was N1m. To carry on its business the company acquired a new factory plant for N7.5m.

Tees Limited has made a claim for roll-over relief. Show how these transactions will be treated for
Capital Gains Tax purposes.

SOLUTION TO Q9.1
For CGT purposes, Tees Limited will be treated:
a. As if neither loss nor gain accrues to it on the disposal. The proceeds of disposal will be taken as
equal to the cost of acquisition, i.e. N1m;
b. As if the cost of acquisition of the new factory plant, N7.5m, were reduced by the excess of the actual
proceeds of disposal of the old factory plan, N5m, over the amount of the proceeds which the
company is treated as receiving in (a) above, N1m. This means that N4m which would otherwise be
capital gain on disposal of the old factory plant will be deducted from the cost of the new factory
plant.
However, for capital allowance purposes, the cost of the new factory plant will be N3.5m, i.e. (N7.5m –
N4m).

151
Q9.2 Jegali Limited is a company based in Ilorin, Kwara State. In January 2014, the company decided to
relocate and concluded the following transactions:
i. Its land and building acquired for N8.5m in 1st July 2000 was disposed for N15m;
ii. Its plants and machinery were sold for N10m. Their original cost was N6m;
iii. A generator costing N2.5m on acquisition was disposed for N3.5m; and
iv. A motor vehicle acquired for N3.5m was disposed for N6m.

The following acquisition took place in Lagos during 2014:


i. Land and Building N20m
ii. Plant and machinery N12m
iii. Generator N5m
iv. Motor vehicle N6m

Required:
a. Compute the capital gains tax liability for the relevant year
b. Determine the relief available, if any, on the new acquisitions.
c. Compute the carrying cost of each of the non-current assets.
d. State the basis upon which capital allowances would be claimed and for which tax year.

SOLUTION TO Q9.2
a.
JEGALI LIMITED
COMPUTATION OF CAPITAL GAINS TAX
FOR 2014 TAX YEAR

Land and Plant and Generator Motor


Building Machinery Vehicle
N‘000 N‘000 N‘000 N‘000
Sales proceeds 15,000 10,000 3,500 6,000
Less: cost of acquisition 8,500 6,000 2,500 3,500
Capital gains 6,500 4,000 1,000 2,500

Capital gains tax @10% N650,000 N400,000 N100,000 ₦250,000

b. COMPUTATION OF ROLL-OVER RELIEF


Land and Plant and Generator
Building Machinery
N‘000 N‘000 N‘000
Capital gains 6,500 4,000 1,000
Deduct the lower of:
Sales proceeds or 15,000 10,000 3.500
Amount reinvested 20,000 12,000 5,000
Less cost of purchase (8,500) (6,000) (2,500)
Amount roll – over 6,500 4,000 1,000
Net capital gains NIL NIL NIL
Capital gains tax NIL NIL NIL

NOTE: Roll over relief is not available for motor vehicle.

152
c. COMPUTATION OF CARRYING AMOUNT

Land and Plant and Generator Motor


Building Machinery Vehicle
N‘000 N‘000 N‘000 N‘000
Amount reinvested 20,000 12,000 5,000 6,000
Less: cost of acquisition 6,500 4,000 1,000 -
Carrying cost 13,500 8,000 4,000 6,000

d. Capital allowances will be claimed in 2015 tax year in respect of the amount reinvested as follows

N‘000
Land and Building 20,000
Plant and machinery 12,000
Generator 5,000
Motor vehicle 6,000

Q9.3 On March 13, 2013, Chief Towobola acquired a house built on an acre of land at the cost of N40m.
Other acquisition expenses were N400,000 legal expenses and valuation fee of N500,000.

On November 15, 2013, another house was erected on the excess space at a cost of N15m. However,
on July 1st 2015, the new building erected by Chief Towobola was sold to his brother for N20m, at this
time the market value of the house was N25m. After the sale, the rest of the property was valued at
N45m.

On January 2016, Chief Towobola sold the rest of the property for N50m after incurring the following
expenses;
N
a. Advertising 200,000
b. Agency fees 500,000
c. Legal expenses 250,000
d. Improvement before sale 1,000,000

Required:
Calculate the capital gains tax for all the relevant years of assessment

SOLUTION TO Q9.3
CHIEF TOWOBOLA
COMPUTATION OF CAPITAL GAINS TAX
FOR 2015 TAX YEAR

₦’000
Sales proceed 25,000
Less cost of acquisition
A 25,000,000 X 55,900,000 = 18,633.3
C =

153
A+B 25,000,000 + 50,000,000 1
Capital gains 6,366.7
Capital gains tax @ 10% 636.7

N’000
NOTE: Total cost of property 40,000
Incidental expenses (N500,000 + N400,000) 900
Cost of construction on open space 15,000
55,900

COMPUTATION OF CAPITAL GAINS TAX FOR 2016 TAX YEAR

N’000
Sales proceed 50,000
N
Less: Advertising 200,000
Agency fees 500,000
Legal expenses 250,000
Improvement before sales 1,000,000 1,950
Net sales 48,050
Less cost of acquisition (N55,900 – 18,633.3) 37,266.7
Capital gains 10,783.3
Capital gains tax @ 10% 1,078.33

Q9.4 Mallam Garba sold 40,000 United States Dollar on 7th July 2015 at N175 per Dollar. This was a portion
of the total portfolio acquired as follows:

a. 9th January, 2009, 10,000 Dollar purchased at N115 per Dollar;


b. 28th November 2011, 5,000 Dollars purchased at N125 per Dollar;
c. 17th March 2012, an uncle from U.S.A sent 15,000 Dollars to him;
d. 11th June 2015, senior brother in Ohio sent 10,000 Dollars; and
e. 15th July 2015, 10,000 Dollars purchased at N150 per Dollar.

Broker’s commission is at 5% and stamp duty is1.5%.

Required:

Compute the capital gains tax due.

154
SOLUTION TO Q 9.4

MALLAM GARBA
COMPUTATION OF CAPITAL GAINS TAX
FOR 2015 TAX YEAR

N N
Sales proceed (N175 x 40,000) 7,000,000
Less: Stock broker’s commission 350,000
Stamp duty 105,000 455,000
6,545,000
Deduct: cost of acquisition (N65.50 x 40,000) 2,620,000
Capital gains 3,925,000
Capital gains tax 392,500

AVERAGE PRICE

DOLLAR PRICE (N) AMOUNT (N)


10,000 115 1,150,000
5,000 125 625,000
15,000 - -
10,000 - -
10,000 150 1,500,000
50,000 3,275,000

Average price = 3,275,000


50,000 N65.50

155
CHAPTER 10

ADMINISTRATION AND COMPUTATION OF WITHHOLDING TAX

Withholding tax (WHT) is not another tax on itself but a payment of tax in advance, however, deducted at
source. It is not a final tax but a tax credit in the settlement of the income tax liability of a taxpayer when it is
determined. And since it is a deduction at source, it gives the taxpayer no option as to whether to pay or not.

Withholding tax therefore, is a tax deducted at source from income before the taxpayer has seen the income
to which the tax applies.

REASON FOR WITHHOLDING TAX

The reasons for introducing withholding tax are as follows:

a. To widen the income tax base;


b. To curb the incidence of tax evasion among taxpayers and to bring the first time taxpayer into the tax net;
c. To increase tax yield;
d. To bring prospective taxpayers into the tax net; and
e. To reduce the cost of tax collection.

LEGAL FRAMEWORK FOR WITHHOLDING TAX

Withholding tax was first introduced into the Nigerian tax system in 1977, by Decree 80 of 1977 and it was
then limited to the following transactions:

a. Rent;
b. Dividends; and
c. Directors’ fees

It was however, expanded by Decree 98 of 1979 and the coverage was further expanded by paragraph 33 of
finance (Miscellaneous Taxation provisions) Decree 4 of 1985 to cover all investment incomes such as
dividends, rent, interests, royalties, and services such as consultancy, technical and management.

Furthermore, the Finance (Miscellaneous Taxation provisions) Decree 12 of 1987 provided that with effect
from 1st January 1987, “tax shall now be deducted from source from gross payments made to individuals,
partnerships, community trustees, executors, family and body of individuals in respect of the following income
sources:

a. All aspects of building, construction, civil work, and related activities;


b. All types of contract activities or agency arrangements other than outright sales and purchase of goods
and property in the ordinary course of business;
c. Professional fees;
d. Technical Services, etc; and
e. Commission.

At present, withholding tax provisions have become part of the income tax legislations as follows:

156
a. Sections 81-82 of CITA, cap C21, LFN 2004, impose an obligation to deduct and remit WHT on
payments and remit same to the FIRS;
b. Section 73-74 of PITA, Cap P8, LFN 2004 as amended imposes an obligation to deduct and remit WHT
from payments made to individual, enterprises ad partnership covered by the Act;
c. Section 56 of PPTA, Cap P3, LFN 2004, as amended, imposes an obligation to deduct and remit WHT
on payments made by persons covered under the Act; and
d. Section 13 of Value Added Tax Act, Cap V1, LFN 2004 imposes an obligation on governments and
Agencies (MDAs) to withhold the VAT at source on all payments and remit such to the FIRS.

RATES OF WHT

The current rates of the WHT are as follows:

Types of payments Rates (Companies) Rates (Individuals)


% %
1. Interest, Rent and Dividends 10 10
2. Royalties 10 5
3. Building and Construction 5 5
4. All types of contracts and agency
arrangements, other than sales in the
ordinary course of business. 5 5
5. Consultancy and Professional Services 10 5
6. Management Services 10 5
7. Technical Services 10 5
8. Commission 10 5
9. Directors fees 10 10

WHT PAYMENT SCHEDULE

Each WHT cheque being paid to Revenue Authorities, by companies and / or individuals must be accompanied
with a payment schedule showing the list of those from whom the tax have been deducted. The payment
schedule must contain the following details:

a. Names of the taxpayers who suffered the deduction;


b. Their addresses;
c. The nature of their activities / services;
d. Their tax file numbers;
e. The total amount payable;
f. The rate of tax applied;
g. The rate of tax withheld;
h. The balance paid to the taxpayer;
i. The tax period of the contract for which returns were being made;
j. The date of payment; and
k. The cheque number and date.

157
PROBLEMS OF WHT ADMINISTRATION

There have been many problems associated with WHT administration in Nigeria. These have been given as:

a. Non – deduction by some organization;


b. Non-remittance after deduction;
c. Deductions at wrong rate;
d. Lumping together of deductions;
e. Incomplete / Incorrect information provided on the schedule;
f. Credit notes not given to taxpayers by Revenue Authorities (deducting agents).
g. Payment to wrong tax authority, for example WHT meant for State being paid to FIRS and vice – versa;
h. Dishonoured cheques; and
i. Failure to co-operate with tax Inspectors by MDAs when they come for inspections.

158
CHAPTER 11

ADMINISTRATION AND COMPUTATION OF DEFERRED TAX

A deferred tax liability is defined as being the amount of income tax payable in future periods in
respect of taxable temporary differences. Simply put, a deferred tax is tax that is payable in the
future. Taxable temporary differences are those on which tax will be charged in the future when the
asset (or liability) is recovered (or settled).

The most common course of temporary differences which results in deferred tax are:
- Depreciation of non-current assets; and
- Revaluation of non-current assets.
Within the financial statements, non-current assets with a limited economic life are subject to
depreciation. However, within tax computations, non-current assets are subject to capital
allowances (also known as tax depreciation) at rates set within the relevant tax law. Where at the
year-end the cumulative depreciation charged and the cumulative capital allowances claimed are
different, the carrying value of the asset (cost less accumulated depreciation) will then be different to
its tax base (cost less accumulated capital allowances) and thus a taxable temporary difference
arises.

Q11.1 A non-current asset costing N200,000 was acquired by a company at the start of year 1. It is
being depreciated on straight line basis over four years resulting in annual depreciation
charges of N50,000. The capital allowances granted on this asset over the four years are:
Yr. 1 125,000
Yr. 2 25,000
Yr. 3 25,000
Yr. 4 25,000
200,000

SOLUTION TO 11.1

As stated above, deferred tax liabilities arise on taxable temporary differences, i.e. those temporary
differences that result in tax being payable in the future as the temporary difference reverses. So,
how does the above illustration result in tax being payable in the future?

Companies pay income tax on their taxable profits. When determining taxable profits, the tax
authority start by taking the profit before tax (accounting profits) of a company from their financial
statements and then make various adjustments – for example, depreciation is considered a
disallowable expense for taxation purposes but instead tax relief on capital expenditure is granted in
the form of capital allowances. Therefore, taxable profits are arrived at by adding back depreciation
and deducting capital allowances from the accounting profits, companies are then charged tax at the
appropriate tax rate on these taxable profits.

159
The carrying value, the tax base of the asset and therefore the temporary difference at the end of
each year are:

Yr Carrying Value Tax base (cost accumulated


(cost accumulated depreciation) capital allowances) Diff
N N
1 150,000 75,000
75,000
2 100,000 50,000
50,000
3 50,000 25,000
25,000
4 Nil Nil Nil

In the above illustration, when the capital allowances are greater than the depreciation expense in
year 1 to 2, the company has received tax relief early. This is good for cash flow in that it delays (i.e.
defers) the payment of tax. However, the difference is only a temporary difference and so the tax
will have to be paid in the future, in year 4, when the capital allowance for the year are less than the
depreciation charged, the company is being charged additional tax and the temporary difference is
reversing. Hence the temporary differences can be said to be taxable temporary differences.

Candidates should notice that overall, the accumulated depreciation and accumulated capital
allowances both equal N200,000 – the cost of the asset – so over the four – year period, there is no
difference between the taxable profits and the profits per the financial statements.

At the end of year 1, the company has a temporary difference of N75,000, which will result in tax
being payable in the future (in year 3 and 4). In accordance with the prudence concept, a liability is
therefore recorded equal to the expected tax payable.

Assuming that the tax rate applicable is 30%, the deferred tax liability that will be recognized at the
end of year 1 is 30% X N75,000 = N22,500. This will be recorded by crediting (increasing) a deferred
tax liability in the Statement of Financial Position and debiting (increasing) the tax expenses in the
statement of profit or loss.

By the end of year 2, the company has a taxable temporary difference of N50,000. The liability
therefore, is now 30% X N50,000 = N15,000. The deferred tax liability now needs reducing from
N22,500 to N15,000 and so is debited (a decrease) by N7,500. Consequently, there is now a credit (a
decrease) to the tax expense of N7,500.

At the end of year 3, the company’s taxable differences have decreased to N25,000. Therefore, the
deferred tax liability needs to be reduced from N50,000 to N25,000 X 30%, i.e. N7,500. So the
deferred tax liability is debited (a decrease) by N7,500 and the tax expenses is credited (a decrease)
by N7,500.

160
At the end of year 4, there are no taxable temporary differences since now the carrying value of the
asset is equal to its tax base. Therefore, the opening liability of N22,500 has been completely
removed at the end f year 4. This is summarized as follows:

Year 1 2 3 4
N N N N
Opening deferred tax liability 0 22,500 15,000 7,500
Increase / (Decrease) in the year 22,500 (7,500) (7,500) (7,500)
Closing deferred tax liability 22,500 15,000 7,500 0

The closing figures are reported in the Statement of Financial Position as part of the deferred tax
liability.

REVALUATIONS OF NON-CURRENT ASSETS

Revaluations of non-current assets (NCA) are a further example of taxable temporary difference.
When an NCA is revalued to its current value within the financial statements, the revaluation surplus
is recorded in equity (in a revaluation reserve) and reported as other comprehensive income. While
the carrying value of the asset has increased, the tax base of the asset remains the same and this give
rise to a temporary difference.

Tax will become payable on the surplus when the asset is sold and so the temporary difference is
taxable. Since the revaluation surplus has been recognized within equity, to comply with matching
concept, the tax charge on the surplus is also charged to equity.

Illustration

Suppose that the asset in our previous illustration is revalued to N250,000 at the end of year 2. The
detail is shown below:

Carrying Value Tax base (cost less


(cost less accumulated depreciation) accumulated capital
allowances)
Yr. 2 N N Diff
Opening balance 150,000 75,000 75,000
Depreciation charged /
Capital allowance (50,000) (25,000) (25,000)
Revaluation 150,000 0 150,000
Closing balance 250,000 50,000 200,000

The carrying value is now N250,000 while the tax base remains N50,000. There is, therefore, a
temporary difference of N200,000 of which N150,000 relates to the revaluation surplus. This gives
rise to a deferred tax liability N200,000 X 30% = N60,000 at the year- end which will be reported in
the Statement of Financial Position. The liability was N22,500 at the beginning of the year (previous
illustration) and has now increased by N37,500. The increase in relation to the revaluation surplus of

161
N150,000 X 30% = N45,000 will be charged to the revaluation reserve and reported within other
comprehensive income. The difference of N7,500 will be treated under tax expenses as deferred tax
now reversed.

The double entry will be as follows:


Dr. Revaluation reserve in equity ₦45,000
Cr. Tax expense N 7,500
Cr Deferred tax liability in SEP N37,500

162
CHAPTER 12

NATIONAL TECHNOLOGY DEVELOPMENT AGENCY ACT.

INFORMATION TECHNOLOGY LEVY

A company with an annual turnover of N100m or more is required to pay 1% of its profit before tax as
information technology tax. It is usually paid along with company income tax.

The levy is applicable to:

a. Banking and other financial institutions, including capital and money market operators, mortgage
institutions, micro- finance banks;
b. Insurance institutions including brokerage firms;
c. Pension fund administrators, pension fund managers and related services.
d. GSM service providers and telecommunication companies; and
e. Cyber and internet service providers;
This is in accordance with National Information Technology Development Agency Act 2007.

163
CHAPTER 13

TREATMENT OF TAXATION IN COMPANIES ACCOUNTS

This lecture shall cover the treatment of current tax expense and liability only as treatment of deferred tax has
been dealt with in the previous lecture.

CURRENT TAX

IAS 12 defines current tax as “the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period”.

The main requirements of IAS 12 with regard to current tax are:


a. Any amount of current tax for an accounting period should generally be recognized as an expense (or
an income if tax is recoverable) and is to be included in the calculation of profit or loss. IAS 12
provides that tax expense should be shown as a separate heading under Statement of comprehensive
income. However:
i. any tax that arises from an item which is recognized in “other comprehensive income” in the
statement of comprehensive income should also be recognized in other comprehensive
income, e.g. revaluation surpluses arising in relation to property, plant and equipment.
ii. any current tax that arises from an item which is recognized directly in the statement of
change in equity should also be recognized directly in the statement of changes in equity, e.g.
an adjustment to the opening balance of retained earnings resulting from the retrospective
application of an accounting policy or the correction of a prior period error.
b. Any current tax that remains unpaid at the end of the period should be recognized as a liability.
However, where the amount paid exceeds the amount due, it is to be treated as an asset. Also, any
benefit relating to a tax loss that can be carried back to recover current tax of a previous period should
be recognized as an asst.
c. Current tax should be measured using tax rates and tax laws “that have been enacted or substantially
enacted by the end of the reporting period”.
d. Any adjustments necessary so as to reflect under estimates or over estimates of current tax in
previous period should be included in the tax expense for the current period and then (if material)
disclosed separately in the notes.

PRACTICAL QUESTION

Q13.1 Niger Limited prepared accounts to 30th June each year. The company’s financial statements for the
year to 30th June 2015 showed a liability for current tax of N1.5m. This was an estimate of the current
tax due for the year to 30th June 2015. The following additional information was given:
a. The current tax due for the year to 30th June 2015 was finally agreed with the tax authority to be
N1.27m and this was paid on 1st May 2016.
b. On 15th June 2016, the company received a dividend of N900,000. The dividend had an attached
tax credit of N100,000 but Niger Limited can make no use of this tax credit.
c. The company estimates the amount of current tax due for the year to 30th June 2016 to be N1.6m.

Required:
Prepare a tax account for the year to 30th June 2016, showing the amount of the current tax expense
for that year and the amount of the current tax liability as at the end of the year.

164
SOLUTION TO Q13.1

CURRENT TAX
N’000 N’000
1/5/2016 Bank 1,270 1/7/2015 Balance b/d 1,500
30/6/2016 Balance c/d 1,600 30/6/2016 S of C I 1,370
2,870 2,870

1/7/2016 Balance b/d 1,600

NOTE:

i. The current tax expense for the year comprises N1.6m less N230,000 over estimate for the previous
year. This is shown in the statement of comprehensive income (S of C I).
ii. Tax credits on dividends are ignored.
iii. The current tax liability at the end of the year is N1.6m.
iv. The current tax expense and the current tax liability will be shown in the company’s financial
statement as follows:

NIGER LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30TH JUNE 2016

N’000
Net profit before tax ?
Tax expense 1,370
Net profit after tax ?

NIGER LIMITED
STATEMENT OF FINANCIAL POSITION
AS AT 30TH JUNE 2016

N’000
Non – Current Liabilities ?

Current Liabilities:
Taxation 1,600

165
CHAPTER 14

CITN PAST QUESTIONS AND ANSWERS

OCTOBER 2012: PROFESSIONAL EXAMINATION


PROFESSIONAL 1: BUSINESS TAXATION
ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3 HOURS

1. a. What do you understand by the term “Stamp Duties”? (2marks)


i. List ten (10) categories of instruments subject to the administration of stamp duties in Nigeria.
(5marks)
ii. List three (3) items exempted from stamp duties. (3marks)
b. i. Briefly, discuss the appointment of Commissioner for Stamp Duties. (3marks)
ii. What are the functions of Commissioner for Stamp Duties? (7 marks)
(Total 20marks)
Assessor’s Comment

The Performance of candidates in this question is good as almost all students attempted it
SOLUTION

1. a. (i) stamp duties are specific or “advalorem” taxes imposed upon instrument

otherwise called wrotten documents. Simply put, stamp duties are taxes paid in
perfecting documents.

(ii) Ten categories of instruments subject to stamp duties in Nigeria.

The following are the categories of Instruments subject to stamp duties.

a. Agreements
b. Appraisement
c. Instrument of Apprenticeship
d. Bank notes, bills of exchange and promissory notes
e. Bills of Lading
f. Conveyances on sale
g. Other conveyances
h. Duplicates and Counterparts
i. Exchange, Partition or Division
j. Leases
k. Letters of powers of Attorney on voting Papers

166
l. Marketable Security
m. Mortgages
n. National Acts
o. Policies of Insurance
p. Receipts
q. Settlements
r. Share Warrant
s. Warrants for goods and
t. Capital of Companies

(iii) List of item exempted from stamp duties. The following are exempted from stamps
duties payment:
i. Liquidation sales/ transaction. Where liquidation is under a compulsory
winding up order by court or a creditors voluntary winding up.
Any assurance, mortgage charge on property forming parts of the assets of
the company in liquidation. A property sold by a liquidator is exempted.
ii. Treaties and Agreements. Treaties / agreement made between the Federal
Government and other foreign governments.
iii. Company reconstitution and amalgamation. This includes such instrument as
a conveyance or transfer of sale assigning debts whether secured or
unsecured.

b. (i) Appointment of Commissioner of Stamp duties.


In Nigeria, all the Federating units (i.e. States) as well as the central government
are empowered by law to establish their own stamp duties offices and appoint
their own commissioners. The commissioner of stamp duties is to be appointed by the
relevant Civil Service Commission at the Federal and State levels
(Section 6 SDA Cap 411 LFN 1990).

(ii) Functions of Commissioner for Stamp Duties:-

Commissioner for Stamp Duties performs both administrative as well as technical


functions.

1. Administrative Functions: Administrative Functions of stamp duties office, e.g.


ensure proper functioning of
- Stamping room where documents are embossed.
- Cash Office where duties are paid and books are balanced on daily basis.
- The archives where copies of stamp document are kept for future use.
2. Technical Function: of the commissioner for stamp duties can be divided into four
viz;
a. Assessments: He / She have the duty of assessing documents at appropriate
duties.

167
b. Stamping or Embossments: This can be by way of embossment with dies, affixing
adhesive stamps, affixing postage stamps in lieu of adhesive stamps and printing
on the Instrument.
c. The custody of dies and stamps. Dies and adhesive stamps used in stamping
instrument are security materials and should therefore be securely kept by the
commissioner to avoid misuse or loss.
d. Adjudication: Sometimes, a commissioner may be required to express opinion on
the amount of duty to be paid on any executed instrument. Where this happens it
will be required by the commissioner to endorse a certificate on the instrument
under the hand of the commissioner stating whether certain amount is chargeable
on the instrument as duty or not.

2 a. Explain the requirements to establish an efficient and effective drawback regime.


(10marks)
b. Itemise necessary steps for Customs-Import clearance process. (10marks)
(Total: 20marks)

Assessor’s Comment

a. The question tested candidates’ knowledge on effective and efficient drawback regime. The
performance of candidates not very poor as the candidates did not understand the question
and they did not even know how to interpret the question.

b. This also even tested students’ knowledge on steps for custom import clearance process. The
performance was also poor. In General student should have to prepare well for the next exam
diet

SOLUTION

2. a. (i) Creation of a high level committee comprising of finance, customs, industries,


trade and stake-holders to develop the procedures to document the requirement and
set time limit for processing of refund claims.
(ii). Drawback should normally cover the whole of the duties paid on imported inputs as
well as the raw materials and intermediate goods used for the production of the final
export, including imported packaging. They should also cover indirect exporters who
have paid for imported material.

(iii) Drawback procedures should be simple and easy to administer, timely and easily
understood by manufacturers. The export declaration should be sufficient proof
exportation and no other documentation should be required.

(iv) There should be in place a mechanism for the periodic replenishment of the budget
required to issue refund.

168
b. The custom import clearance process normally consists of various distinct steps.

These steps are:-

(i) Cargo declaration by the carrier to the customers


(ii) Temporary storage of awaiting goods
(iii) Customs import good declaration:
- Preparation and submission of the goods declaration by the importer.
- Automated risk management
- Checking the good declaration and supporting document
- Assessment of the goods declaration
(iv) Physical inspection of the goods
(v) Collection of the duties and taxes by customs or on its behalf by commercial Banks
(vi) Release of the goods to importer
(vii) Delivery of the goods to importer
(viii) Post clearance auditing of the importer by customs
(ix) Pre- shipment inspection regimes

3 Neutric Telecommunications Limited based in Cologne, Germany with a representative office in


Nigeria. Its main business is in the area of private telecommunication which is carried out all over
the world.

The following data were obtained for the 56.25 million minutes recorded world-wide during the
year ended 31st May, 2007.

Germany to the rest of Europe 22,425,000 minutes


Germany to the USA 11,812,500 minutes
Germany to the rest of Africa 5,062,500 minutes
Germany to Nigeria 7,950,000 minutes
Nigeria to Germany 6,600,000 minutes
Nigeria to the rest of the world 2,400,000 minutes

The following additional information were provided:


N
a Salaries and personnel costs 43,380,000
b Licences and other operational costs 118,432,500

169
c Repairs and maintenance 15,375,000
d Depreciation of fixed assets 100,500,000
e General provision for doubtful debts is 2% of turnover
f Income Tax provision 33,750,000
g Calls are made at the rate of 0.375 euro for every 3 minutes. It
was agreed that the rate of exchange shall beN140 to every Euro

Required
a. Compute the Income tax payable for the relevant tax year. (15 marks)
b. How would your computation be affected if you were informed that Nigerian income
should be taken at 221/2% of turnover? (5 marks)
(Total: 20 marks)

Assessor’s Comment

Nearly all the candidates attempted the question. The performance was poor as many candidates did
not understand the requirements of the examiner. Student should view wide at professional levels.

SOLUTION

3. NEUTRIC TELECOMMUNICATION LTD


COMPUTATION OF TAX LIABILITY FOR THE YEAR 2008 ASSESSMENT
N’000 N’000
(i) Global Income (56.25m x 0.375 Euro x 140)= 984,375
3

(ii) Nigeria Income N(9m x 0.375 x 140) = 157,500


3

(iii) Global Adjusted Profit.


Income 984,375
Less: Salaries and personal costs 43,380
Licenses and other operational cost 118,433
Repairs and maintenance 15,375 177,188
Adjusted profit 807,187

(iv) Adjusted Profit Ratio (APR)


= Global Adjusted Profit x 100%
Global income
= 807,187,000 x 100 = 82%

170
984,375,000

(v) Depreciation Ration (DR)


=
Global Depreciation x 100%
Global income
= 100,500,000 x 100% = 10.21%
984,375,000

(vi) Nigerian Adjusted Profit


= Nigerian Income + APR
= (157,500,000 x 82%) = 129,150

(vii) Deduct = Capital Allowance


= DR x Nigerian Income
= (10.21% x 157,500,000) = 16,081
Delivered (16,081)
Nil

Taxable Income 113,069

Tax Liability at 30% 33,921

Education Tax N(129,150,000 x 2%) 2,583

NEUTRIC TELECOMMUNICATION LTD


COMPUTATION OF TAX LIABILITY FOR 2008 TAX YEAR

N’000 N’000

b. Adjusted Profit

= (221/2 % of N984,375,000) 221,484

Lees: Capital Allowance

= 35% of N(100,500,000) 35,175

Relieved 35,175 35,175

Nil

Taxable Income 186,309

Tax at 30% 55,893

Education tax (2% of N221,484,000) 4,430

171
4 New Lagoon Limited is plumbing and electrical consulting engineers and has been in business for
many years. The profit and loss account of the company for the year ended September 30, 2009
is as follows:
N N
Consultancy fees received 12,500,000
Profit on disposal of motor vehicle 150,000
12,650,000
Less Overheads:
Directors` remuneration 1,240,000
Staff salaries, wages and allowances 5,895,000
Communication expenses 266,000
Electrical and water 174,500
Bank Charges and interest 235,600
Motor running expenses 382,300
Bad and doubtful debts 142,500
Office rent 2,200,000
Depreciation of fixed assets 1,600,000
Repairs and maintenance 895,000
Auditors’ remuneration 300,000
Legal and professional charges 125,000
Miscellaneous charges 85,000
13,540,900
Net loss for the year N(890,900)

The following additional information are available:


a. One of the directors is an architect and utilizes a wing of the office block for his professional
practice. It is estimated that the proportion so occupied is about one-fifth of the total
office space. It is also agreed that one- tenth each of the expenditures on electricity, water
and communication expenses relate to the architectural practice.

b. An analysis of bad and doubtful debts account is as follows:


N N
Bad debts written off during the year 150,000
Provision of 2% on the total of sales ledger balances 32,900
182,900
Bad debt previously written off now recovered 30,000
Specific provisions for bad debts no longer required 10,400 (40,400)
142,500

172
c. Repairs and maintenance include:
Cost of replacing wooden door with glass sliding door 80,000
Electrical and plumbing maintenance in architectural practice 25,000
d. Legal and professional charges:
Fines for traffic offence 50,000
Penalty for late filing of annual returns 35,000
e. Miscellaneous charges include donation of N25, 000 to Apapa Boat club

Required:
Compute the adjusted profit of Messrs New Lagoon Limited for income tax purposes
(20marks)

Assessor’s Comment

The performance was generally good but some candidates were preparing a profit and loss account
instead of preparing a profit adjustment. They could not determine the relevant year of assessment.
A lot of other candidates were computing income tax liability instead of profit adjustment statement.

SOLUTION

4. Messrs New Lagoon Limited

Computation of Adjusted Profit

2010 year of Assessment

N N

Net Loss as per Account (890,900)

Add: Expenses not allowable

Depreciation of Fixed Assets 1,600,000

Office Rent – proportion used for arch – practice 440,000

Electricity + Water ─ Architectural practice 17,450

Communication Expenses ─ Architectural practice 32,900

Repairs & Maintenance:

Glass Sliding doors (Improvement) 80,000

Architectural practice Expenses 25,000 105,000

173
Legal + professional Charges:

Fines for traffic offence 50,000

Penalty for late Filling of returns 35,000 85,000

Donation to Apapa Boat Club 25,000

2,331,950

1,441,050

Less: profit on disposal of motor vehicles 150,000

Adjusted Profit N1,291,050

TANKO NIGERIA LIMITED


COMPUTATION OF CAPITAL GAINS
TAX PAYABLE FOR 2008 TAX YEAR

N N
Sales Proceeds 50,000,000
Less:- Advert on disposal 200,000
- Agents Fees 200,000
- Lawyer’s Fees 500,000 900,000
Net Sales Proceeds 4,910,000
Deduct:
- Renovation of the Property 1,000,000
- Fencing of the Property 5,000,000
- Advert in Daily newspaper 200,000
- Legal Fees 500,000
- Agency Commission 350,000
- Advertisement on Local TV 200,000
- Cost of Acquisition 35,000,000 42,250,000
- Capital Gains 6,850,000

Capital Gain Tax @10% 685,000

5. a. Certain gains are exempted from Capital Gains Tax. List four (4) of such exemptions in
relation to Capital Gains Tax. (2marks)

b. Briefly discuss the following terms


i. Chargeable Assets (2marks)
ii. Disposable Assets (2marks)
iii. Chargeable Gain (2marks)

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c. TankoNigeria Limited bought a property in Lagos for N35, 000,000. The company proposed to
dispose the property. The following incident expenses were incurred to assist in immediate
disposal of the property.

N
- Renovation of part of the property 1,000,000
- Fencing part of the property 5,000,000
- Advertisement in a daily newspaper 200,000
- Legal fees 500,000
- Agents Commission 350,000
- Advertisement on local TV station 200,000
The property was finally disposed off in October 2007 for 50,000,000 and similarly the
following incidental expenses were incurred:
N
- Lawyer`s fee 500,000
- Agent’s fees 200,000
- Advertisement in a local newspaper 200,000

Mr.Kehinde who bought the property also suffered the following costs:
N
- Cost of acquisition 50,000,000
- Agency commission 7,500,000
- Legal fees 3,500,000
- Renovation improvement 4,250,000

Required:
Compute the Capital Gains Tax (if any) payable by TankoNigeria Limited stating the relevant
year of assessment and relevant tax authority. (12marks)
(Total 20marks)

Assessor’s Comment

This question was a bonus question because it was well attended and the performance was good

SOLUTION

5. The Relevant Tax Authority is Federal Inland Revenue Service


a. (i) Chargeable Assets- For the purpose of Capital Gain Tax, all asset shall be
Chargeable Assets i.e. assets chargeable to capital gain tax, except those exempted in
the ACT. Chargeable Assets include all properties, land, building, plant, machineries,
equipment, furniture, fittings and fixtures, motor vehicle etc.

(ii) Disposal- Assets are said to be disposed where any capital sum is derived at sale,

175
lease, transfer, an assignment, compulsory acquisition or any to other disposition of
assets. Disposal is deemed to have taken place even where no asset was acquired by
the person paying such capital sum.

(iii) A Chargeable gain will arise where upon disposal of a chargeable asset, the sales
proceed exceeds the cost of acquiring the Chargeable Assets disposed and all other
incidental expenses to the disposal.

b. Exemption from Capital Gains Tax Includes:

(i) Capital Gain arising from disposal of Government Security.


(ii) Capital Gain arising from disposal of shares and securities
(iii) Capital Gain arising from disposal of medal won for honour and gallant performance.
(iv) Capital Gain arising from disposal of motor vehicle for private use.
(v) Any capital gain accruing to diplomatic body.
(vi) Capital Gain arising from disposal of a personal dwelling house etc.

OCTOBER 2013:PROFESSIONAL EXAMINATION


P T 1: INCOME TAXATION
ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3HOURS

1 (a) Write short notes on:


i. Actual Year Basis
ii. Normal Basis
iii. Abnormal Basis
iv. Penultimate Tax Year and
v. Ultimate Tax Year (5 Marks)

(b) Mr. Dangote, a business mogul had been preparing accounts to 30 June for many years. In
year 2008, he decided to change his accounting date to September 30 th of every year. His
adjusted profits in recent years are as follows:
N
Year ended 30 June 2006 800,000

Year ended 30 June 2007 840,000

Year ended 30 June 2008 720,000

Period ended 30 September 2008 240,000

Year ended 30 September 2009 480,000

Year ended 30 September 2010 360,000

Year ended 30 September 2011 400,000

You are required to:


176
Compute the assessable profits for all relevant years of assessment taking into
consideration the practice of the Revenue. (15 Marks)
(Total 20 Marks)

P.T. 1 INCOME TAX

SOLUTION TO QUESTION 1

a. i. Actual Year Basis: This is the basis period that coincides with the basis period of
the government running from 1st of January to 31st December of every year. Example
of tax liabilities that will arise on actual year basis are the taxation of Employees,
Capital Gains Tax and Petroleum Profit tax. In effect, income or profits earned in a
particular year are being subjected to tax in the same year.

ii. Normal Basis Period: For a normal basis period, the following features must be in
place;
a. The number of months in the basis period should neither be more than twelve.
b. The basis period must have commenced the day after the end of the previous one
i.e. there must be continuity.
c. There must be only one permanent year end i.e. there must be consistency.

iii. Abnormal Basis: This occurs where any of the three conditions listed under normal
basis is not obtained, then an abnormal basis period results. An abnormal basis period
is obtained under any of the following situations:
a. On commencement of a new business.
b. Where there is a change in accounting date.
c. On the cessation of a business.

iv. Penultimate Tax Year: The penultimate tax year represents the year before the year of
cessation of business. The basis period for assessable profit for the penultimate tax
year is on the preceding year basis.

v. Ultimate Tax Year: This is the yea of cessation or year where a business ceased
operation. The basis period for assessable profit is from the beginning of government
tax year (usually 1st January) up to the year of cessation.

b. Mr. Dangote
Computation of Assessable Profit for the Relevant Tax Year of Assessment:

177
Year of Assessment Basis Period Assessable Profit

2009 1/7/2007 – 1/6/2008 720,000


2010 1/7/2008 – 1/6/2009 600,000
2011 1/7/2009 – 1/6/2010 390,000
1,710,000

Working:
2010 1/7/2008 – 30/9/2008 240,000
1/10/2008 – 30/6/2011 = 9/12 x 480,000 360,000
600,000

2011 1/7/2009 – 30/9/2010 = 3/12 x 480,000 120,000


1/10/2010 – 30/6/2011 = 9/12 x 360,000 270,000
390,000

NEW DATE:
Year of Assessment Basis Period Assessable Profit

2009 1/10/2007 – 30/9/2008 780,000


2010 1/10/2008 – 30/9/2009 480,000
2011 1/10/2009 – 30/9/2011 390,000
1,650,000

Working:
2010 1/10 – 30/6 = 9/12 x 720,000 540,000
1/7/ - 30/9 = 240,000
780,000

2011 1/7/09 - 13/9/09 = 3/12 x 480,000 120,000

1/10/09 – 30/6/10 = 9/12 x 360,000 270,000

390,000

2 (a) Write short note on the following:


i. Executor
ii. Personal Representative
iii. Settlor

178
iv. Annuitant
v. Duties of a Trustee or Executor (10 Marks)

(b) Mr. Otedola married many wives with three (3) children, at his death, he left his estate in
the hands of the trustees infavour of his three children Saheed, Peter and Ike. The
following information was made available by the trustees in respect of the estate at the
end of December 2011.

Rental Income (gross) 900,000


Trading Income 400,000
Dividends (gross) 200,000
Interest 140,000
Sundry Income 142,000

The following additional information is available:

(a) The interest received is from the GTB PLC.


(b) Interest on debt repayment by the settlement is N40,000
(c) Each beneficiary is entitled to 25% share of the net distributable income.
(d) Fixed annuity to a beneficiary is N60,000 (gross)
(e) Trustees remuneration per trust deed:
- Fixed remuneration N20,000
- 20% of chargeable income.
(f) Administrative and other expenses N80,000
(g) The trust deed allows the trustees to make discretionary payments to the three
children as follows:
Saheed N25,000
Peter N15,000
Ike N10,000

(h) Capital allowance is N50,000


(i) The children have no other income.

You are required to compute:


i. Income tax payable by the trustees on the trust income. (5 Marks)
ii. The amount due to each beneficiary. (5 Marks)
(Total 20 Marks)

SOLUTION TO QUESTION 2

a. i. Executor: This is a representative appointed by the WILL or CODICIL of a


deceased person to administer his Estate after his death.

179
ii. Personal Representative: He is a person whether Executor or Administrator, who is
charged with the Administration of the Estate of a deceased person and in whom the
Estate is vested for the purpose of distribution.
iii. Settlor: This shall include any person by whom settlement was made or enter into
directly or indirectly or any person who has provided or taken it upon himself to
provide funds for the purpose of settlement.
iv. Annuitant: This is he who receives an annuity of a fixed amount out of the income of a
settlement or trust and shall be assessed to tax upon the full amount of the annuity. A
person who receives a pension is also an annuitant.
v. Duties of A Trustee or Executor: Every trustee or Executor shall be answerable for all
things to be done in connection with the tax of the estate or income apportioned to
the relevant tax authority. It shall be duties of the Trustees or Executor to prepare for
each year ended 31st December or to the date on which the assets of the settlement,
trust, or estate are finally distributed.

b. The Trustee of Mr. Otedola’s children


i. Computation for Income Tax Payable by the Trustee for 2011 Tax Year:

Total Saheed Peter Ike


N N N N N
Rental Income 900,000
Trading Income 400,000
Dividends 200,000
Interest 140,000
Sundry Income 142,000
Total Income 1,782,000
Less: Expenses:
Trustee’s Remuneration:
Fixed 20,000
Variable 263,667
Interest on Dept 40,000
Fixed Annuity 60,000
Administrative Expenses 80,000 463,667
Computed Income 1,318,333
Less Capital Allowance: 50,000
Restricted 50,000 50,000
1,268,333
Less Discretionary Payments 50,000 25,000 15,000 10,000
Remainder of Computed Income 1,218,333
Less: Distribution 925,749 304,583 304,583 304,583
Trustee’s Income 292,584
Tax Payable:

ii. Income Due to Beneficiaries 329,583 319,583 314,583

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Variable Trustee’s Remuneration:

N N

Total Income 1,782,000


Less: Fixed Remuneration 20,000
Interest 40,000
Fixed Annuity 60,000
Administrative Expenses 80,000 200,000
1,582,000

20% of Income = ₦1,582,000 x 20


120

= ₦263,666.666
₦263,667

3. (a) List 10 (ten) incomes exempted from tax according to the Personal
Income Taxation Act CAP P. 13 LFN 2004 as amended (10 Marks)

(b) In the filing of withholding tax returns, state four (4) information that you will expect to
see in the schedule. (8
Marks)

(c) State two problems associated with withholding tax administration.


(2 Marks)
(Total: 20 Marks)

SOLUTION TO QUESTION 3

a. Ten incomes expected from tax according to the Personal Income Tax Act CAP. P8 LFN 2004
as amended:
i. All consular fees received on behalf of a foreign state and all income of consular
officers or employees except income from trade, business, profession or vocation
carried on inland waters.
ii. Gains or profits from the business of operating ships or aircrafts carried on by any one
not resident in Nigeria in so far as in the case of ships, the business is not carried on in
inland waters.
iii. Income of any ecclesiastical, charitable or educational institution of a public character
provided such is not derived from a trade or business carried on by such institution.
iv. Wound and disability pensions to members of the Armed Forces.
v. Pension granted to any person under the provision of the Pension Act relating to
widows and orphans.

181
vi. Income of any trade union registered under the Trade Union Act provided such
income is not derived from a trade or business carried on by such trade or business
carried on by such Trade Union.
vii. Income and profits of cooperative societies.
viii. Sums received by ways of consolidated compensation for death or injuries.
ix. Income earned from outside Nigeria by a temporary guest, lecturer, teacher, nurse,
doctor, and other professional and brought into Nigeria shall be exempt from tax
provided that such is brought in convertible currency and paid into a domiciliary
account in a bank approved by the government.
x. Income earned from abroad by an author, sportsman, playwright, musical artiste and
brought into Nigeria is exempt from tax provided that such income is brought into
Nigeria in foreign currencies and paid into a domiciliary account in an authorized bank.
xi. Any compensation for less of employment.
xii. Interest accruing to a person on foreign currency domiciliary accounts.
xiii. Incomes earned from bonds issued by the Federal, State and Local government and
their Agencies.
xiv. Incomes earned from bonds issued by corporate and supra nationals.
xv. Interest income earned by holders of bonds and short term securities.

b. The following information would be expected when filing withholding tax return:

i. The name of the taxpayer making the return.


ii. The name(s) of the beneficiary (ies).
iii. The relevant year of assessment to which the return relate.
iv. The nature of transaction i.e. whether contract, dividend, interest, consultancy etc.
v. The gross amount payable
vi. The application rate of withholding tax.
vii. The withholding tax deducted
viii. The net amount payable.
ix. The taxpayer identification number of the taxpayer that is TIN.

c. The problems are as follows;


i. Application of wrong rates
ii. Lumped schedule of payments
iii. Non deduction of tax at source
iv. Failure to remit the tax deducted.
v. Payment to wrong tax authority.
vi. MDA’s keeping back what they have deducted or not deducting at all.

4. (a) In relation to Capital Gains Tax, certain disposals are exempted from tax.
State five (5) gains on which Capital Gains Tax would not be chargeable.
(5 Marks)

(b) Write short notes on:


i. Incorporeal Properties

182
ii. Chargeable Assets
iii. Partial Roll Over Relief (6 Marks)

(c) Mukeke Limited purchased a set of plants and machinery at a cost of N720,000 on 1st
January, 1998. Part of the plant and machinery was sold on 31st December, 2010 for
N500,000. The company incurred N20,000 as expenses incidental to the sale.
The market value of the remaining plant and machinery was N900,000 on 31st December
2010.

You are required to compute:


i. The chargeable gain if any, accruing on the asset sold. (6 Marks)
ii. The new cost of the remaining asset. (3 Marks)
(Total: 20 Marks)

SOLUTION TO QUESTION 4

a. The following capital gains are exempted from tax:

i. Capital gains on the disposal of government security.


ii. Capital gains on the disposal of investment under a super-annuation fund scheme.
iii. Capital gains on the disposal of investment by a local government authority.
iv. Capital gains on the disposal of a landed property through forced acquisition by the
government.
v. Capital gains on the disposal of any medal won for honour and gallantry.
vi. Capital gains on the disposal of a mechanically propelled vehicle for the carriage of
goods and passengers.
vii. Capital gains arising from the disposal of an asset by an ecclesiastical, charitable or
educational institution of a public character.
viii. Capital gains arising from the disposal of an asset by any statutory or registered
friendly society.
ix. Capital gains arising from the disposal of an asset by any cooperative society
registered under cooperative society law of any state.
x. Capital gains arising from the disposal of an asset by any trade union registered under
the Trade Union Act, provided the asset was not acquired in connection with any trade
or business carried out.
xi. Gains accruing on disposal of land compulsory acquired by an authority having and
exercising such compulsory powers.
xii. Gains accruing to any purchasing authority company established by or under any law
in Nigeria and is empowered to acquire any commodity in Nigeria for export and from
Nigeria.
xiii. Gains accruing to corporation for the purpose of fostering economic development of
any part of Nigeria provided the gains are not derived from the disposal of any assets
acquired by the corporation in connection with any trade or business carried on by it.
xiv. Gains accruing on disposal of investments held as part of any national provident fund
or other retirement benefits scheme.

183
xv. Gains accruing from a disposal of Nigerian Government Securities, stocks and shares;
this is with effect from January 1998.
xvi. Any sum paid as Compensation or damages for injury suffered by an individual in his
person or on his profession or vocation.
xvii. Sums obtained by way of compensation for loss of business shall not be chargeable
gains except where compensation or damages exceeds N10,000 in any year of
assessment.
xviii. Gains accruing to individual from disposal of a dwelling house or part of a dwelling
house which is, or has at any time in his period of ownership been, his only or main
residence shall not be chargeable gains in any year of business.
xix. Gains accruing from a disposal of tangible moveable property sold for N1,000 or less in
a year of assessment. (section 38).
xx. With respect to gains accruing from a disposal of a gift, the person making the disposal
shall not be chargeable to CGT tax
xxi. Any gains arising from the acquisition of the shares of a company either taken over, or
absorbed or merged by another company as a result of which the acquired company
loses its identity as a limit liability company, provided that no cash payment is made in
respect of the shares acquired.
xxii. Gains accruing to unit holders of a unit trust in respect of disposal of securities
provided the proceeds are re-invested.

b. i. Incorporeal Properties: These are, in accounting sense, fictitious assets; such as


patents, copyrights, trademarks, etc. The capital gain on the disposal of an incorporeal
property is the actual sales proceed on its disposal. No cognisance is given to the cost
of acquisition. The only allowable expense is the legal cost of protecting such
properties.

ii. Chargeable Assets: chargeable assets are assets whose disposal will result in a
chargeable gain.
Example of chargeable asset include:
a. Options, debts and incorporeal properties.
b. Currencies other than the Nigerian Naira.
c. All qualifying capital expenditures.
The capital gain on the disposal of an option is the actual amount paid for the option
because no cognisance is given to its cost of acquisition.

iii. Partial Roll Over Relief: This is obtained where the amount invested in the new
asset acquired to replace the disposed one is less than the sale proceed on the
disposal of the asset.

The key condition attached is that the amount must not be lower than the original
cost of acquiring the asset disposed. This means that for a relief to be granted, the
taxpayer must invest nothing less than the cost of the old asset disposed. The
implication of a partial roll over relief is that only a portion of the capital gain tax

184
payable is immediately due. The balance may be deferred to the future when the
newly acquired asset is subsequently disposed.

c. i. Computation of Chargeable Gains for 2010:


Tax Year N
Sales Proceed 500,000
Less: Incidental Cost 20,000
Net Sales Proceed 480,000
Deduct cost of acquisition
5,000,000 x 720,000
500,000 + 900,000

= 360,000,000 = 257,000
1,400,000

Chargeable Gains = 223,000

ii. The new cost of the remaining Asset:


N
Cost of the whole Property 720,000
Less: Cost of part disposed 257,000
Cost of remaining asset 463,000

5. (a) The Relevant Tax Authority as defined in the FIRS, Self-Assessment Regulation 2011 is
“The Federal Inland Revenue Service or the State Internal Revenue Service as specified in
the provisions of the relevant tax laws”. There are some features which distinguish FIRS
from SIRS. State five (5) of such features.
(10 Marks)

(b) Write short notes on:


i. Mergers and Acquisitions (5 Marks)
ii. Composition of Technical Committee of the Board, either the FIRS
Board or State Board. (5 Marks)
(Total 20 Marks)

SOLUTION TO QUESTION 5

a.
i. The FIRS is fully autonomous and no longer part of the Civil Service. Not all the SIRS are
autonomous.
ii. The FIRS is the only tax authority that collects the Petroleum Profit Tax.
iii. The FIRS is the only one that collects the capital gains tax from corporate bodies.
iv. The FIRS is the tax authority that handles the National Tax Policy.

185
v. FIRS is the tax office that initiates amendments to tax laws in conjunction with the National
Assents.
vi. The executive chairman of FIRS is the chairman of Joint Tax Board while other chairman of
SIRS are members
vii. The FIRS is the highest paying relevant tax authority in Nigeria terms of salaries and
allowances payable to staff.
viii. FIRS is the only body that has Coordinating Directors in its structure.
ix. FIRS administers taxes at the Federal level while the SIRS administers at the state level.
x. FIRS is the only tax authority that collects the information technology tax and education tax.
xi. FIRS is the only tax authority that collects taxes of corporate bodies from all plc companies,
petroleum producing companies and banks.
xii. FIRS has offices in all over the Federation at least one tax office in one state, while the SIRS
are restricted to their states. e.g LIRS cannot have a tax office in any other state apart from
the Lagos state.
xiii. FIRS is the only taxes authority that collects taxes from the residents of Federal Capital
Authority.
xiv. FIRS is the only body that collects the taxes of non residents, the Military and the Police
officers apart.

b i. Merges and Acquisitions


- A merger is the combination of two or more entities by direct acquisition of all assets
by one corporation.
- A merger is the amalgamation of two firms on equal terms into one new legal
entity.
- A merger is the process whereby two previously autonomous business combine to
form a larger concern under a common control.
Acquisition entails the taking over of one business by another, having a bigger
resource base.
The two words mergers and Acquisitions are often used interchangeably in practice.

ii. Composition of Technical Committee of the FIRS Board.


Section 9 of the FIRS ACT establishes the Technical Committee of the FIRS Board as
follows:
1. There shall be a technical Committee of the Board (in this Act referred to as “the
Technical Committee”) which shall consist of –
a. The executive Chairman of the Service as Chairman;
b. All the Directors and Heads of Departments of the Service.
c. The Legal Adviser of the Service.
d. The Secretary to the Board.
2. The Technical committee of a State Board of Internal Revenue has the following as
members:

a. The Chairman of the State Board as Chairman


b. The Directors within the State Service
c. The Legal Adviser to the State Service

186
d. The Secretary of the State Service

187
APRIL 2014:PROFESSIONAL EXAMINATION
P T 1: INCOME TAXATION
ATTEMPT ALL QUESTIONS. SHOW ALL WORKINGS. TIME: 3HOURS

1. (a) Your client informed you that he had recently disposed off his dwelling-house located in
Abeokuta at a substantial profit, and he requires to know whether this will be subjected
to capital gain tax.
What matters would you need to consider when advising him? (6
Marks)

(b) Mallam Danladi acquired two properties (X and Y) in Abuja on 1st January, 2000 at the
cost of ₦2,000,000 and ₦11,500,000 respectively. Mallam Danladi lives in property ‘X’.
On 10th March, 2010 he used ₦2,500,000 to convert part of this dwelling house into a
self-contained flat and sold it to his younger brother for ₦3,300,000.

Property ‘Y’ consists of two (2) detached bungalows, and he sold one of the bungalows to
his elder sister for ₦6,300,000 also on 10th March, 2010.

The market value of the apartment he sold to his younger brother at the time of sale was
₦4,000,000 whilst the market price of the bungalow sold to his elder sister at the time of
sale was ₦8,750,000. He had used ₦1,950,000 to refurnish the bungalow before sale.
The market price of the unsold bungalow on 10th March, 2010 was ₦11,000,000.

You are required to:


(i) Explain what is meant by ‘connected persons’ under Capital Gains Tax Act Cap C1
LFN 2004. (6 Marks)

(ii) Compute capital gains tax payable by Mallam Danladi. (8 Marks)


(Total 20 Marks)
SOLUTION 1

MATTERS TO BE CONSIDERED WHEN ADVISING MY CLIENT ON DISPOSAL OF ITS DWELLING HOUSE


AT A PROFIT

 Gains accruing on disposal of a dwelling house which has been the individual’s only or main
residence throughout the period of ownership up to the time of disposal or up to the last
twelve months from the date of disposal shall be exempted from
 The dwelling house shall also include the Land which the owner occupy for his enjoyment or
such area as the board may determine
 Where an individual has two or more dwelling houses for the purpose of determining which is
the main residence
The following would be considered:

188
i. Whether the individual give notice in writing to the Board provided the notice was given
within two years from the beginning of that period
ii. Where notice is not given by the individual the Board will determine which residence is the
main residence
iii. If the dwelling house or part thereof was acquired for the purpose of realizing a gain from its
disposal.
(b) (i) CONNECTED PERSON

Are persons that are related who are not likely to deal with one another at arm’s length?
Transactions between such persons are deemed fictitious or artificial; tax authority will
therefore disregard any disposition between such persons

For the person of Capital Gain Tax (CGT) where there is disposal between connected persons,
and the market value is higher than the actual sales proceed , the consideration shall be taken
as the market value

Examples of connected persons include

(i) An individual is connected with his or her spouse


(ii) A partner is connected with whom he is in partnership
(iii) A company is connected with another company if the same person controls both
(iv) Persons of blood relation are deemed to be connected

Definition and explanation = 4 marks


2 Examples @1mark = 2marks

(b) (ii) Mallam Danladi

COMPUTATION OF CAPITAL GAINS TAX LIABILITY FOR 2010 YEAR OF ASSESSMENT

(i) Disposal of self-contain flat to younger brother



Consideration - taken as market value 4,000,000
Less cost of construction (2,500,000)
Capital Gain 1,500,000
(ii) DISPOSAL OF BUNGALOW TO ELDER SISITER
Consideration (taken as market value) 8,750,00

Less cost of part sold

8,750,000 x ₦11,500,000 = (5,094,937)

8,750,000 + 11,000,000 1

189
Cost of refurbishing the bungalow = (1,950,000)
Capital Gain 1,705,063
=========

Total chargeable gain ₦1,500,000 + N1,705,063 = ₦3,205,063

Capital Gain Tax 10% ₦3, 205,063 = ₦320,506

8 ticks @1mark = 8marks

2. (a) Explain how Tertiary Education Tax Fund Act 2011 (as amended) should be disbursed in
accordance with Education Tax Act, Cap E4 LFN 2004 and state what constitutes an
offence under the Act. (8 Marks)

(b) Lukudi Ltd. deals with ceramic products. The profit and loss account of the company for
the year ended 31st December, 2012 is as follows:

₦’000

Profit for the year 12,000

After charging:-

Depreciation 1,800

General provision for bad debts 900

Donations to political party 3,000

After crediting:-

Profit on sale of fixed assets 1,005

Additional information:-

(i) Capital allowance agreed for the year ended 31st Dec., 2012:-

Annual Allowance 1,575

Balancing charge 930

(ii) Unrelieved losses brought forward from previous year of assessment 1,275

Required:
Compute the Education Tax and Income Tax payable. (12 Marks)
(Total 20 Marks)

190
SOLUTION 2 INCOME TAX (PT 1)

(a) (i) DISBURSEMENT OF EDUCATION TAX FUND


The board of trustees is charged with the responsibility of administering the Education tax and
disbursing the amount of the Education Tax Fund to Federal State and Local Government Educational
Institutions including Primary, and Secondary School for the restoration rehabilitation and
consolidation of education in Nigeria. Specifically for the following:

(i) Work centres and prototype development


(ii) Staff development and conference attendance
(iii) Library system at different levels of education
(iv) Research equipment procurement and maintenance
(v) Higher education book development fund
(vi) Redressing any imbalance in enrolment mix as between the higher, educational institutions,
and
(vii) Execution of the 9 year compulsory education programme

The tax is to be disbursed to the various level of education as follows:

Higher education 50%


Secondary education 20%
Primary education 30%

The amount allocated to higher education is to be distributed to the universities, polytechnics


and colleges of education in the ratio 2:1:1 4
marks

(b) LUKUDI LIMITED


COMPUTATION OF EDUCATION AND INCOME TAX LIABILITY FOR 2013 YEAR OF ASSESSMENT

₦’000 ₦’0000

Profit for the year 12,000


Add:
Disallowed expenses:-
Depreciation 1,800
General provision for bad debts 900
Donations to political parties 3,000

5,700

17,700
191
Less: Profit on sales of fixed assets 1,005
Adjusted/Assessable profit 16,695
Add: Balancing charge 930

17,625
Less: Unrelieved less brought forward 1,275
16,350
Less: Capital Allowance (Annual Allowance) 1,575
14,775
======
Education Tax = 16,695 x 2% ₦333,900
========
Income Tax = ₦14,775 x 30% ₦4,432,500
========
20 ticks@1/2 marks 10marks

3. In recent times government has noted with concern the increasing incidence of “Tax
avoidable” and “tax evasion”, especially amongst wealthy businessmen, business women,
contractors and self-employed professionals. Accordingly government has spelt out certain
transactions in respect of which Tax Clearance Certificate (TCC) must be produced.

You are required to:-


(a) List any five transactions in respect of which tax clearance certificate must be
produced. (9 Marks)

(b) Highlight the conditions which must be fulfilled before a tax clearance certificate can
be issued by the Federal Inland Revenue Service to a company which has commenced
operation and one that is yet to commence operation. (6 Marks)

(c) Under what grounds can an application for tax clearance certificate be rejected by
Federal Inland Revenue Service. (5 Marks)
(Total 20 Marks)
SOLUTION 3

TRANSACTION FOR WHICH TAX CLEARANCE CERTICATE MUST BE PRODUCED

(i) Application for government loan for industry/business


(ii) Registration of motor vehicle
(iii) Application for fire arm licence
(iv) Application for approval of building plans
(v) Registration of children in government schools
(vi) Application for certificate of occupancy
(vii) Application for award of contract by government agencies and registered companies

192
5 Marks

(b)(i) CONDITION WHICH MUST BE FULFILLED BEFORE TAX CLEARANCE CERTIFICATE CAN BE
ISSUED BY FEDERAL INLAND REVENUE SERVICES TO A COMPANY WHICH HAS COMMENCED
BUSINESS

(i) The company must be registered with Federal Inland Revenue Service
(ii) If the company has registered for not less than twelve months, a copy of the company’s
audited financial statement together with the tax computations thereon must be filled at
the tax office within six months of the company accounting date
(iii) If the company is filling on self assessment basis, tax clearance can be obtained after
submission and payment of tax thereon
(iv) Tax clearance will be issued if there is no liability against the company and the company
applied for such tax clearance 1 part @1mark = 4marks

b(ii) CONDITION THAT MUST BE FULFILLED BEFORE TAX CLEARANCE CAN BE ISSUED TO
COMPANY THAT COMMENCED OPERATION

(i) For a company that has not commenced operations and has been incorporated for over six
months. A statement of affairs of the company must be filed with Federal Inland Revenue
Service
(ii) Pre operational levy will be paid as follows:
First year N20,000 p.a. and subsequent year N25,000.p.a.
2marks

c. GROUNDS UNDER WHICH APPLICATION FOR TAX CLEARANCE CERTIFICATE MAY BE


REJECTED

i Where taxes due have not been paid

ii Where penalties or interest is still outstanding

iii Where outstanding tax returns have not been filed

iv Where the case is with the tax appeal tribunal (TAT) for hearing and part of the tax has
not been paid as required

v TCC once rejected cannot be said to still be under processing but it is kept on hold until
issues outstanding have been resolved or sort out by the tax payer with the relevant tax
office 5marks

4a. (i) What is a qualifying capital expenditure. 2 Marks

(ii) Briefly state three (3) conditions which must exist before granting capital allowance.
193
3 Marks

b. KPJ Ltd. a bottled water manufacturer commenced business on 1 st April, 2010 and makes up
its accounts annually to 31st December. The company incurred qualifying expenditure as
follows:-

Assets Purchased Date of Purchase Cost (N’000)

Plant & Machinery 3/04/2010 3,600

Motor Vehicle 2/01/2011 2,250

Furniture 1/03/2011 450


Required:
Compute capital allowance for the first three years of assessment.
Capital allowances are claimable at the following rates:
Plant & Motor Vehicle Furniture (%)
Machinery (%) (%)

Initial Allowance 50 50 25

Annual Allowance 25 25 20

The company was also granted 10% Investment Allowance. (15


Marks)
(Total 20 Marks)
SOLUTION 4

QUALIFING CAPITAL EXPENDITURE

These are capital expenditure incurred in a basis period which qualifies the Assets for capital
allowances that is, capital expenditure on plant machinery furniture building etc. It is not all capital
expenditure or fixed assets that can be regarded as qualifying expenditure for example the cost of
land is not treated as qualifying capital expenditure.

Also qualifying capital expenditure should not be construed as original purchase price or cost of
construction of the assets only (2 marks)

CONDITIONS WHICH MUST EXIST BEFORE GRANTING CAPITAL EXPENDITURE

(i) The company must have incurred qualifying capital expenditure in respect of an asset for the
purpose of its trade or business
(ii) The company must be the owner of the assets at the end of the basis period for a year of
assessment

194
(iii) The assets must be used for the purpose of a trade or business carried on by the company at
end of the basis period for year of assessment
(iv) A company must make claims for capital allowance for a year of assessment before it is
granted, however, FIRS may grant an allowance if it’s of the opinion that it is reasonable
and just.

KPJ LIMITED

COMPUTATION OF CAPITAL ALLOWANCE

PLANT & MACH M/V FUNRITURE TOTAL ALL’CES


Initial / Annual 50/25 50/25 25/20
Inv. Allowance 10 - -
N’000 N’000 N’000 N’000
2010 YOA
(1/04/2010 – 31/12/10)
Cost 3,600
Inv. Allowance 360
Initial Allowance
(3,600 x 50%) (1,800)
Annual Allowance (9months)
(N1800 x 25% x 9/12) (337.5) 337.5
Total Allowance
DV C/FWD 1,462.5 2,835
====== =====
2011 Y0A
(1/4/2010 - 31/3/2011)
COST - 2250 450
Initial Allowance - (1125) (112.5) 1237.50
Annual Allowance (450) (281.25) (67.5) 798.75
TWDV C/FWD 1012.5 843.75 270 -_____
Total Capital Allowance 2036.25
========
2012 YOA
1/1/2011 - 31/12/2011
Annual Allowance 450 (281.25) (67.5) 798.75
TWDV C/FWD 562.5 562.5 202.5
===== ======= ===== =======
Total Capital Allowance 798.75
======

195
5a. (i) What is Taxpayer Identification Number (TIN)?

(ii) State the minimum requirement for the issuance of TIN to the following:-
(i) Corporate Taxpayer
(ii) Enterprises and NGOs
(iii) Individuals, Armed Forces, Police Command.

State two (2) advantages of TIN. (12 Marks)

b. Distinguish between the following forms of tax assessment under Companies


Income Tax Act Cap C24 LFN 2004.
(i) Original assessment and revised assessment.
(ii) Best of judgement assessment and back duty assessment. (8 Marks)
(Total 20 Marks)
SOLUTION 5

(a)(i) DEFINITION OF TIN

TIN is an acronym for Taxpayer Identification Number. It is electronically generated as part of the
Registration process with tax authorities such as Federal Inland Revenue Services or State internal
Revenue service.

Tin is assigned to aid corporate taxpayers, enterprises, individual resident in the FCT, Armed forces,
police command, foreign mission MDA’s and NGO’s

aii MINIMUM REQUIREMENT FOR ISSUANCE OF TIN TO :

CORPORATE TAXPAYERS

a Certificate of Incorporation
b Name of the Company
c Registered address: with Corporate Affairs Commission
d Line of business e.g. agriculture, trading etc
e Date of incorporation
f Business Address: Location of the Company

ENTERPRISES AND NGO’S


(i) Business name and registration number
(ii) Name of company
(iii) Registered address with CAC
(iv) Business address: location of the company
(v) Line of business and date of incorporation

INDIVIDUALS, ARMED FORCES, POLICE


196
(i) Unique name
(ii) Address
(iii) Means of identification, such as:
International passport
National I.D. Card
Drivers licence etc

ADVANTAGES OF TIN

(i) Tin provides enhanced taxpayer service coupled with better tax environment
(ii) It mends leakage in the system and improves data base of taxpayers
(iii) It is a form of unique and proper identification of taxpayer
(iv) Tax payers are able to transact business and are able to claim credit notes for the withholding
taxes deducted from their transaction/contract 12 Marks

ORIGINAL ASSESSMENT

The first or main assessment of a particular year of assessment is called the ORIGINAL assessment.
Where a company has delivered audited accounts and returns the FIRS may make an assessment
based on the profits declared by the company if the account and returns are satisfactory. The FIRS
may raise a best of judgement assessment where no account and returns have been delivered or
where they have been rejected.

REVISED/AMENDED ASSESSMENT

This can be issued as a replacement of the original assessment where a company has made a
compromised is reached between the company and FIRS on the current amount of tax payable, the
assessment will be amended accordingly and a notice of amended assessment served on the
company.

Where an objection has been made and the company and FIRS fails to agree on tax payable, the
company will be given a notice of refusal to amend the assessment 2 marks

BEST OF JUDGEMENT ASSESSMENT

Where the audited accounts and returns filled by a company are rejected by FIRS or where a
company has failed to file its audited accounts and returns and the FIRS is of the opinion that such
company is liable to pay tax, the FIRS may according to the best of its judgement make an
assessment accordingly

Best of judgment assessment is an estimated assessment. The tax authority uses its discretion or
judgment to estimate what it thinks the total profits should be and then make an assessment based
on the estimated total profit.

BACKDUTY ASSESSMENT

197
If any form of fraud, willful default or neglect has been committed by or on behalf of any company in
connection with any tax imposed by the FIRS may at any time and as often as may be necessary
assess that company at such amount or additional amount as may be necessary for the purpose of
making guide any loss of tax attributable to the fraud, willful default or neglect.

Back duty assessment can extend beyond the normal six years allowed for additional assessment to
recover the tax lost through tax fraud or tax evasion.

OCTOBER 2014: PROFESSIONAL EXAMINATION


P T 1: INCOME TAXATION
ATTEMPT ALL QUESTIONS. TIME: 3HOURS

1. As a result of adoption of International Financial Reporting Standards (IFRS) by Nigerian


Companies, IFRS compliant Financial Statements shall be included in tax returns in line with
Financial Reporting Council road map for adoption. As a result of this, taxpayers are required
to furnish Federal Inland Revenue Service (FIRS) with all DEFERRED TAX disclosures as
contained in the standard.

In the light of the above:


(a) Distinguish between CURRENT TAX and DEFERRED TAX. (4 Marks)

(b) Briefly explain the following deferred tax related terms:


(i) Carrying Value.
(ii) Tax Base.
(iii) Temporary Differences. (6 Marks)

(c) The following information extracted from the related IFRS compliant Financial
Statements and tax returns submitted to FIRS by corporate taxpayers as follows:
(i) A company has a machine with a carrying value of N34.4million and with a tax
written down value of N3.2million.
(ii) A company has provided for the environmental clearing cost of N16million and
this has been disallowed for tax purpose.
(iii) The tax computation of a company resulted to carry forward loss of
N10million.
(iv) The book value of financial asset classified as “available for sale”
wasN18million as at 1st of January 2012 and by year end the market value of
the assets wasN21million.
(v) During the year, impairment loss ofN6million was charged to income
statement in respect of Property Plant and Equipment (PPE) acquired for

198
N30million. The accumulated depreciation at the year end was N8million
while total capital allowance claimed so far on the assets was N10million.

Required:
Calculate the deferred tax effect of this transactions using current income tax rate of
30% per annum. (10 Marks)
(Total: 20 Marks)

SOLUTION TO QUESTION 1

(a) CURRENT TAX


Current tax is the amount of Income Tax payable or recoverable in respect of the taxable
profit or loss for a period.

At the end of a reporting period, an estimated amount is usually determined by applying the
company tax rate in force on the taxable profit to accrue for the amount of tax based on the
year’s profit adjusted for income tax purposes.

When the tax is actually paid some month later, it may not be exactly the same amount as
that accrued where there are any amendment to the underlying accounting profit. An over or
under provision is therefore left on the tax payable account.

An over provision arises where the actual tax paid is less than the estimated tax charged. This
reduces the following years tax charged in the income statement.

An under provision arises where the actual tax paid is more than the estimated tax charged.
This increase the following years tax charged in the income statement.

DEFERRED TAX
Deferred tax is the tax consequences of future recovery/settlement of the carrying amount of
assets/liabilities that are recognized in an entity’s statement of financial position.

Deferred tax is not a current liability or an assets to or from the tax authority; rather it is an
accounting adjustment.

Deferred tax arises because the profit before tax for accounting purposes is not the same
amount as taxable profits for taxation purposes.

Therefore Deferred Tax


- Recognized the future tax effect of income or an expense in the period in which the
income or expense is recognized.
- Recognized future tax expense immediately so as to ensure that profits are not
overstated.
- It also ensures that accounting profit are not distorted by the effect of tax.

199
(b) (i) CARRYING VALUE:- Is the amount at which an asset is recognized after deducting any
accumulated depreciation and accumulated impairment losses.

(ii) TAX BASE:- Is the amount attributed to asset or liability for tax purposes for example
the tax base of a non-current asset is the tax written down value (i.e. cost less
cumulative capital allowance).

(iii) TEMPORARY DIFFERENCES:- These are differences between carrying amount of an


asset or liability in the statement of financial position and its tax base.
Temporary difference may be either taxable temporary difference or deductible
temporary differences.

(c) (i) Machine N’m


Carrying value (assets) 34.4
Less: Tax base 32.0
2.4
Deferred tax effect = N2.4m x 30% = N720,000 Deferred tax liability

(ii) Environmental Cleaning Cost N’m


Carrying value (liability) (16)
Less: Tax base 0
(16)
Deferred tax effect = N16m x 30% = N4,800,00 Deferred tax asset

(iii) Adjusted Tax Loss N’m


Carrying value 0
Tax loss (10)
(10)
Deferred tax effect = N10m x 30% = N3,000,000 Deferred tax asset

(iv) Financial Assets N’m


Carrying value 21
Less: Tax base (18)
3
Deferred tax effect = N3m x 30% = N900,000 Deferred tax liability

(v) Property Plant and Equipment N’m


Carrying value (N30m – 6m – 8m) (16)
Less: Tax base (N30m – 10m) (20)
(4)
Deferred tax effect = N4m x 30% = N1,200,000 Deferred tax asset

2. (a) State the procedure for computing personal income tax based on Personal Income Tax
(amendment) Act of 2011. (7 Marks)

200
(b) Your friend who employed some staff to help him run his business approached you
and complained that the tax officers were disturbing him with non-remittance of Pay
As You Earn (PAYE) and that the staff ought to also pay tax on some benefits they
enjoyed from the company car and housing accommodation.
Prepare short notes to explain the following to him;
(1) Pay As You Earn (PAYE)
(2) Benefits in kind (5 Marks)

(c) Mr Ajilo a public servant at Federal Ministry of Education on Grade level 16 steps 3
complained to you that he needed to have an idea of how much would be deducted
from his salary on personal income tax for the month of January 2013. He is aware
that the tax provision of Personal Income Tax (Amendment) Act, 2011 will now be
applied. Mr Ajilo provided the following information relating to his remuneration:-
Annual salary on grade level16 step 3 is N2,373,301.

He contributes regularly to the National Pension Scheme and National Housing Fund
and he enjoys no benefits-in-kind.

You are required to compute the tax liability of Mr Ajilo for the month of January
2013. (8 Marks)
(Total: 20 Marks)

SOLUTION TO QUESTION 2

(a) PROCEDURE FOR COMPUTING PERSONAL INCOME TAX BASED ON PERSONAL INCOME TAX
(AMENDMENT) ACT OF 2011

Step 1:- Consolidated Salary/Gross Emolument


Determine consolidated salary which is the gross emolument of the taxpayer per
annum.

Step 2:- Consolidated Relief Allowance


Provide relief allowance of N200,000 or 1% of the consolidated salary whichever is
higher plus 20% of the consolidated salary.

Step 3:- Tax Exempt Items


Confirm taxpayer’s contribution or involvement in any of the following tax exempt
items:
(i) National housing fund contribution
(ii) National health insurance scheme
(iii) Life assurance premium
(iv) Gratuities

201
Step 4:- Ascertain Chargeable Incomes
Compute taxable incomes based on steps 1 to 3 above which is consolidated salary
less total relief costs from step 2 and 3 above).

Step 5:- Tax Income Rates (Tax Band)


Apply the following tax income rate (tax band) to the chargeable income to arrive at
the tax payable per annum.
First N300,000 at 7%
Next N300,000 at 11%
Next N500,000 at 15%
Next N500,000 at 19%
Next N1,600,000 at 21%
Above N3,200,000 at 24%

Step 6:- Determination of Minimum Tax


Where the chargeable income obtained in step 5 above is lower than 1% of the
consolidated salary or gross emolument then, 1% of consolidated salary shall be the
tax payable per annum.

Step 7:- Monthly Tax Payable


The tax payable per annum shall be divided by 12 (in the case of individuals on PAYE
Scheme).

(b) SHORT NOTES


PAY AS YOU EARN (PAYE)
PAYE scheme is a method of collecting tax due on employment incomes. The employer is
regarded as an unpaid agent of the tax authority and as such expected to deduct tax on
salaries and wages, bonuses allowances and benefit in kind.

This system ensures that tax is withheld monthly from employees salaries and wages before
the employees are paid.

The employer is obliged to remit the taxes withheld to the relevant tax authority not later
than 10th day of the month following that of deduction.

BENEFITS IN KIND
These are earnings usually from employment other than in cash as part of compensation for
services rendered by employee. That is they are benefits provided by a company to the
employee of the company.

The taxable portion of benefits in kind are included in gross emoluments of employees for
taxation purposes.

(c) COMPUTATION OF TAX LIABILITY OF MR AJILO FOR THE MONTH OF JANUARY 2013

202
N N

Consolidated salary grade level 16/3 2,373,301

Less: Consolidated relief:-

N200,000 + 20% x 2,373,301 674,660

Pension contribution:-

(7.5% x 2,373,301) 177,998

National housing fund

(2.5% 2,373,301) 59,332

Total relief (911,990)

Chargeable income: 1,461,311

1stN300,000 @ 7% 21,000

Next N300,000 @ 11% 33,000

Next N500,000 @ 15% 75,000

Balance N361,311 @ 19% 68,649

₦1,461,311

Annual Tax Liability 197,649

Tax Liability for the Month of January 16,470

3. (a) Distinguish between Value Added Tax (VAT) and Withholding tax. (10 Marks)

(b) Lesgay Nigeria Ltd is a company that renders supportive services to some blue chip
companies. The followings information were extracted from the books of the company
as at 31 December 2013.

STATEMENT OF PROFIT OR LOSS (EXTRACT)


Income: N’000 N’000

Interest income 1,500

Recruitment fee 42,500

203
Contract supplies 89,100

133,100

Expenses:-

Admin expenses 45,000

Legal Expenses 10,000

Payment to supplies 67,500

Audit fees 1,500

Management fee paid to XYZ 6,000


LTD

130,000

Net income 3,100

From the information you are required to;


(i) Compute VAT payable by the company for the year. (4 Marks)
(ii) Compute the withholding tax remittable by the company. (4 Marks)
(iii) What are the penalties for failure to remit withholding tax by a company.
(2 Marks)
(Total: 20 Marks)
NOTE:- Assume all figures are VAT exclusive.

SOLUTION TO QUESTION 3

(a) VAT AND WITHHOLDING TAX


Value Added Tax: Is a tax charged on value added during the course of production of goods
and services. VAT is a multi-staged level tax collected on sales at all stages of sales and
distribution.

VAT is imposed at a single rate of 5% on the invoice value of goods and services supplied by a
VATable person.

204
VAT is a tax on consumption i.e. it is a consumption tax payable on goods and services
consumed by any person whether government agencies, business organization or individuals.
It is levied at all stages of production and distribution of goods and services.

WITHHOLDING TAX
Withholding tax on the other hand is a method of collecting tax at source from certain
services of income. The taxes withheld are to be remitted to the relevant tax authority. It is
an anti-tax evasion tool, which ensures that income which would have escaped tax is taxed
accordingly.
It is not another form of tax. Examples of incomes that suffer withholding tax are rent,
divided, interest, royalties etc.

(b) LESGAY NIG. LTD


(i) COMPUTATION OF VAT PAYABLE
N’000 N’000

OUTPUT VAT:

Contract supplied (N89,100 x 5%) 4,455

Recruitment fees (N42,500 x 5%) 2,125 6,580

Less: INPUT VAT

Payment to supplies (N67,500 x 5%) 3,375

VAT PAYABLE 3,205

VAT PAYABLE is / 3,205,000

(ii) COMPUTATION OF WITHHOLDING TAX REMITTABLE


N’000

Payment to supplies (N67,500 x 5%) 3,375

Legal fees (N10,000 x 5%) 500

Audit fee (N1,500 x 5%) 75

Management fee to XYZ Ltd (N6,000 x 10%) 600

Withholding tax remittable 4,550

(iii) PENALTY FOR FAILURE TO REMIT WITHHOLDING TAX

205
Any organization or MDA that fails to deduct and remit withholding tax shall be guilty
of an offence and shall be liable to a penalty of 10% p.a. of the tax not withheld or not
remitted in addition to the tax plus interest at the prevailing commercial rate.

4. Professional Bank Plc has been in business for many years. Its profit and loss account for the
year ended 31 December 2007 is as follows:

INCOME N’000 N’000

Interest on agriculture loans 13,500

Interest on export loans 6,000

Interest on overdraft, advances and other loans. 143,25


0

Foreign exchange income 49,500

Lease finance income 10,500

Fee and commission 69,750

Profit on sale of fixed assets 225

292,72
5

Expenses

Interest expense 93,750

Depreciation 10,200

Loans and advances written off 18,000

General provision for loan losses 6,150

Specific provision for loans losses 5,250

General and administrative expenses 112,95


0

246,30
0

Net profit 46,425

206
Additional Information:
(i) The general and administrative expenses include the follow:-

N’000 N’000

Salaries and wages 69,000

Directors remuneration 6,900

Penalties for contravention of CBN regulation 750

Audit fees 1,800

Office rent, rate and electricity 10,500

Stationery, postage and telephone 5,250

Repair and maintenance 8,400

Legal expenses:

Loan recovery 1,350

Cost of tax appeal 300

Acquisition of land 450

Stamp duty on increase in share capital 75 2,175

Luncheon vouchers 4,875

Donations:

National library 150

Abeokuta social club 90

MD’s political party 3,000

University of Ibadan Teaching Hospital 60 3,300

112,950

Additional Information:
(ii) Capital allowance and balancing charge for the year ended 31 December 2007
amounted to N189million and N2.1million respectively.
(iii) All loans granted by the bank for agricultural trade or business had no moratorium or
grace period.
207
(iv) Schedule of interest on loans for manufactured goods for exports are:-

Repayment period Grace period Amount of Interest

including moratorium N’000

Above 7years Not less than 2years 2,700

5-7years Not less than 1 ½years 975

2-4years Not less than 1year 825

Below 2years NIL 1,500

6,000

Required:
Compute the tax liability of the bank for the relevant year of assessment.
(20 Marks)

SOLUTION TO QUESTION 4
PROFESSIONAL BANK PLC
COMPUTATION OF TAX LIABILITY FOR 2008 YEAR OF ASSESSMENT
N’000 N’000

Net profit 46,425

Add:- Disallowed expenses

Depreciation 10,200

General provision for loan losses 6,150

Penalties for contravention of CBN regulation 750

Legal: Cost of tax appeal 300

Acquisition of land 450

Stamp duty on increase in share capital 75

Donations:- Abeokuta social club 90

MD’s political party 3,000 21,015

67,440

208
Less:- Non Taxable Income

Profit on sale of fixed assets 225

Interest on loans for export (w1) 3,713 3,938

63,502

Information technology levy (w2) 629

62,873

Add:- Balancing charge 2,100

64,973

Less:- Capital allowance (18,900)

Taxable profit 46,073

N’000

TAX LIABILITIES

Income tax (30% x N46,073) 13,822

Education tax (2% x N62,873) 1,257

Information technology development levy 629

WORKING NOTES
W1:- Interest on loans for manufacturing goods for export:-
Repayment period Grace period Amount of Rate of tax Amount
including moratorium interest exemption (%) exempted
N’000 N’000
Above 7years Not less than 2years 2,700 100 2,700
1
5 – 7years Not less than 1 /2years 975 70 683
2 – 4years Not less than 1year 82 40 330
Below 2years Nil 1,500 Nil Nil
3,713

W2:- Information Technology Levy

209
N’000

Net profit 46,425

Add:- Disallowed deductions 21,015

67,440

Less:- Non-taxable income (3,938)

63,502

Information technology levy = Rate of ITD Levy x Adjusted


100 + Rate of ITD Levy Assessable profit
Profit before ITD levy
= 1 x 63,502 = N629,000
100 + 1 1

5. Jupital Insurance PLC is a Nigerian company which carries on a non-life insurance


business.

The following figures were extracted from the company’s financial statement for the year
ended 31stDecember, 2009.
N

Premium received 7,000,000

Dividend received(net) 583,200

Premium paid on insurance 80,000

Premium paid on reinsurance 420,000

Claims paid 1,900,000

Claims recovered under reinsurance 410,000

Profit on sale of fixed asset 34,000

Provision for unexpired risk as at 1/1/2009 915,000

Provision for unexpired risk as at 710,000


31/12/2009

Agency expenses 147,000

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Management expenses 775,000

Capital allowance for the year 72,000

Balancing charges on fixed assets sold 27,000

Required:
(a) Compute the income tax payable by the company for 2010 year of assessment.
(15 Marks)

(b) Compute the education tax payable by the company for 2010 year of assessment.
(2Marks)

(c) Under what condition is a company chargeable to a minimum tax in a year of


assessment. (3 Marks)
(Total: 20 Marks)

SOLUTION TO QUESTION 5
(a) JUPITAL INSURANCE PLC
COMPUTATION OF INCOME TAX PAYABLE FOR 2010 YEAR OF ASSESSMENT
N N

Premium received 7,000,000

Dividend received (100/90 x 583,200) 648,000

7,648,000

Less: Dividend (Frank investment income) (648,000)

7,000,000

Less:

Premium returned to the insured 80,000

Premium paid on reinsured 420,000 (500,000)

6,500,000

Provision for unexpired risks

Add provision as at 1/1/09 915,000

211
Less provision as at 31/12/09 (710,000) 205,000

6,705,000

Claims paid/recovered:

Less claim parol 1,900,000

Add claims recovered under reinsurance 410,000 (1,490,000)

5,215,000

Less:

Agency expenses 147,000

Management expenses 775,000 (922,000)

Assessable profit 4,293,000

Add balancing charge 27,000

4,320,000

Less capital allowances 72,000

Total profit 4,248,000

Income tax payable (30% x 4,248,000) 1,274,400

(b) JUPITAL INSURANCE PLC


N N

Computation of education tax payable for 2010 year of


assessment

Assessable profit 4,293,000

Education tax payable (2% x 4,293,000) 85,860

(c) Conditions under which a company on chargeable to a minimum tax in a year of assessment
(i) Where the company has made a loss
(ii) Where there is no tax payable
(iii) Where the tax payable is less than the minimum tax

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APPENDIX 1
BIBLIOGRAPHY

Soyode, L. and Kajola, S. O.: “Taxation Principles and Practice in Nigeria” Ibadan: Silicon Publishing Company,
2006.

ICAN Study Pack: “Advanced Taxation”, Lagos: VI Publishers, 2009.

Somorin, O.A: “Teju Tax Reference Book”, Vol I and II: Lagos, Malthouse Press Limited, 2012.

Alan Melville: “International Financial Reporting”, Fourth Edition, Pearson, UK, 2014

Companies Income Tax Act Cap C21, LFN 2004, as amended.

Personal Income Tax Act Cap P8, LFN 2004, as amended.

Petroleum Profits Tax, Cap P13, LFN 2004, as amended.

Capital Gains Tax Act, Cap CI, LFN 2004

Tertiary Education Trust Fund (TETF) Act 2011

Value Added Tax, Cap V1, LFN 2004, as amended.

Taxes and Levies (Approved list for collection) Act T2, LFN 2004

Federal Inland Revenue Service (Establishment) Act, Cap F36, 2007.

Industrial Development (Income Tax Relief) Act Cap 17, LFN 2004

National Information Technology Development Agency Act 2007.

Nigeria Pension Reform Act 2014

Industrial Training Fund Act Cap 19, LFN 2004, as amended

National Housing Fund Act 2, 1992.

CITN, Past Questions and Suggested Solutions.

FIRS PUBLIC ENLIGHTENMENT & SENSITIZATION HANDBOOK 2010 TAX GUIDE

WIKIPEDIA

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